University of Wisconsin at Stout removes historic paintings that might make some students "feel bad": We don't need no stinkin' art!

Who controls the past controls the future. Who controls the present controls the past.

George Orwell

In the latest incident of  higher education silliness, the University of Wisconsin at Stout removed two historical paintings from the common areas of Harvey Hall to more obscure locations.  The paintings seem inoffensive enough. One depicts French fur traders and Native Americans canoeing the Red Cedar River, and the other shows a French palisade fort.

Robert M. Meyer
Chancellor of UW Stout
Ph.D. in Industrial Engineering

But UW Stout's Chancellor, Robert M. Meyer, wanted the paintings moved. "There's a segment of Native American students, that when they look at the art, to them it symbolizes an era of their history where land and possessions were taken away from them, and they feel bad when they look at them," Meyer explained.

What a stupid thing to do! Both paintings were commissioned by the Works Progress Administration in 1936. Painted by Wisconsin artist Cal Peters,these works form part of our national heritage of public art that was created during the Great Depression. As I child, I recall seeing WPA murals in the post office of my home town in Oklahoma--depictions of Plains Indians painted by a Native American artist. When I grew older, I realized how privileged I was to have a daily opportunity to see great and historic art every time I visited my local post office.

Are our universities really going to remove historic art because it might make a few people feel bad? I felt bad when I viewed Picasso's Guernica in Madrid, and I felt really bad after visiting the Rothko Chapel in Houston, where I gazed upon a a room full of  Mark Rothko's dark canvasses.  But I would never demand that  a particular piece of art be banished from a public place simply because it makes me uncomfortable.

Perhaps Chancellor Meyer's bizarre move can be explained by the fact that he does not have a liberal arts background. Meyer received his bachelor's degree in industrial education and his Ph.D. in industrial engineering. He may know nothing about the WPA art program; in fact, he may know nothing about art.

But Meyer's politically correct perspective on art and history is shared by people who really should know better.  All over the United States, college administrators are changing the names of buildings and removing campus statuary to expunge the record of historical figures whose views are now politically inconvenient.

In fact, our college presidents have become the modern-day incarnation of Winston Smith, the lead character in George Orwell's 1984. Smith worked in the Records Department of the Ministry of Truth, where he continuously rewrote the historical record of events to fit the ideology of  Big Brother.

But of course, this politically correct scrubbing of historical figures and events is selective. Jefferson Davis'  statue is consigned to obscurity at the University of Texas because he was president of the Confederacy. But Harvard Law School will never change the name of Langdell Library, in spite of the fact that the building was named for Dean Christopher Columbus Langdell, a nineteenth century anti-Catholic bigot who refused to admit any law-school applicant who had received an undergraduate degree from a Catholic college.

Little by little, and day by day, the intellectual atmosphere of American colleges and universities is descending into a culture of paranoia, cowardice and deception reminiscent of Stalinist Russia. Universities are no longer the guardians of our common culture and shared values. Instead, they are merely the shrill enforcers of the shifting prejudices of postmodern nihilism.

And yet our American university presidents still arrogantly believe that they offer educational experiences that are so valuable that young people should borrow thousands of dollars to get a college education.  What a crock!

This painting makes some people feel bad.

References

Rich Kremer. UW-Stout Moves Controversial 80-year-old Murals. Wisconsin Public Radio, August 5, 2016. Accessible at http://www.wpr.org/uw-stout-moves-controversial-80-year-old-murals

Federal Reserve Bank Report: Households with "negative wealth" tend to have high levels of student loan debt. Should we be surprised?

Households with more debt than assets are said to have "negative wealth." In other words, they owe more than they own. Or to put it more baldly, they're broke.

Researchers for the Federal Reserve Bank of New York published a report this week on negative wealth households, and some of  their findings are not surprising.

Researchers found that negative-wealth households "are younger, predominantly female, more likely to be minority, own homes at lower rates and have lower average annual incomes than households with nonnegative wealth" (quoting from Inside Higher Education). This is what we would expect.

What I found most interesting were the report's findings about the kind of debt that negative wealth households tend to have. Among households that have $47,000 to $52,000 in negative wealth, almost half of their total debt is student loans. Among households with lower levels of negative wealth--between $12,500 and $46,300--college loans made up 40 percent of total debt.

And here is the report's money quote:

Given the importance of student debt in explaining negative household wealth . . ., it is likely that the steady growth in student debt and borrowing combined with the slow rate of student loan repayment . . ., has materially contributed and will continue to contribute to negative household wealth and wealth inequality. 

Should we be worried by this report?

At least a couple of experts suggest that we should not be overly concerned. In an interview with Inside Higher Education, Robert Kelchen of Seton Hall University said that student loans are driving income inequality with just one group of students--those who take out student loans but never complete their degree.

Kelchen pointed out that a lot of households with negative wealth include borrowers "who took out student loan debt to pay for graduate school and professional degrees." Although this group may carry a lot of student-loan debt, it will eventually do well financially.

But of course Kelchen's observation is not completely accurate. Law school graduates, on average, leave law schools with $140,000 in debt; and they are entering a terrible job market. Paul Campos, a law professor at the University of Denver, flatly stated that most people who graduate from second- and third-tier law schools at the bottom or their law school class will be financially hurt by their law school experience. They will likely never obtain an income that justifies the debt they incurred to get their J.D. degrees.

Mark Kantrowitz, another expert quoted in Inside Higher Education, suggested that people who borrow money to get a college degree will be better off than people who don't go to college at all. "Would these individuals have been able to obtain a college education had they not borrowed?" Kantrowitz asked. "And where would their net worth be if they hadn't taken on this debt because they hadn't gone to college?"

Basically, Kantrowitz is repeating the mantra of the higher education community's insiders. Sure, they say, people borrow heavily to go to college. But they're still better off than people who don't go to college at all.

But that is not necessarily true. We know that 35 percent of the college-educated workforce is made up of people holding jobs that do not require a college education.  If those people borrowed a significant amount of money to get their degrees, they might very well have been better off had they skipped the college experience altogether.

And we also know that some people pay more for their college degrees than they are worth. Brenda Butler, who filed for bankruptcy recently, borrowed $14,000 to get a bachelor's degree in English from Chapman University in California, which she obtained in 1995. According to the bankruptcy court's opinion in her case, Butler never made much more than $30,000 a year, and she experienced some periods of unemployment when she was unable to make her loan payments. Twenty years after she graduated from college, Butler owed more than twice what she borrowed and was in bankruptcy.  I think we can safely say that Butler does not fit Kantrowitz's model.

In short, we should not dismiss this recent report from the Federal Reserve Bank of New York. The report confirms what we already knew intuitively, which is this: Student-loan indebtedness contributes to rising income inequality in the U.S. and it cripples some families from acquiring wealth.  And as the government shifts millions of college borrowers into 20- year, 25-year, and even 30-year repayment plans, the trend documented by the Federal Reserve Bank researchers is only going to accelerate.

References

Butler v. Educational Credit Management Corporation, Case No. 14-71585, Chapter 7, Adv. No. 14-07069 (Bankr. C.D. Ill. Jan. 27, 2016).

Andrew Kreighbaum. Federal Reserve analysis finds high student loan debt in housholds with most negative wealth. Inside Higher Education, August 3, 2016. Accessible at https://www.insidehighered.com/news/2016/08/03/federal-reserve-analysis-finds-high-student-loan-debt-households-most-negative?utm_source=Inside+Higher+Ed&utm_campaign=56be543194-DNU20160803&utm_medium=email&utm_term=0_1fcbc04421-56be543194-198564813

Olivier Armantier, Luis Armona, Giacomo De Giorgi, and Wilbert van der Klaauw. Which Households Have Negative Negative Wealth? Liberty Street Economics, August 1, 2016. Accessible at http://libertystreeteconomics.newyorkfed.org/2016/08/which-households-have-negative-wealth.html#.V6IRq3qxUwf

St. Catharine College of Kentucky is in receivership: More small colleges will close as federal oversight squeezes small liberal arts colleges out of business

Last month, St. Catharine College closed its doors for the final time. More than 100 faculty members and staff were laid off, and a federal court placed the college in receivership, which means a court-appointed overseer will manage the institution's assets on behalf of creditors.

St. Catharine's leaders blamed its closure on the U.S. Department of Education. DOE put the college on its "Heightened Cash Scrutiny" list, subjecting it to more onerous regulation of its federal financial aid money.  College administrators said DOE's move was unjust and forced the college to close.

St. Catharine is one of 517 colleges and universities on DOE's latest "Heightened Cash Scrutiny" list, which includes proprietary schools, a few public universities,  about 40 foreign institutions, and quite a few small liberal arts colleges like St. Catharine.  Not all these schools will  close in coming years, but some of them will.

For example, Shimer College is on the list; Shimer only has about 100 undergraduates. How long do you think Shimer will last? Pine Manor College, a small school in Brookline, Massachusetts, is also on the list. Pine Manor had about 500 students in the fall of 2015; and the total cost of attendance (tuition, room and board, etc.) is $43,000. How healthy do you think Pine Manor is?

Small liberal arts colleges all over the United States will be closing at an accelerating rate in the coming years.  The cost of attendance is simply too high at these little schools. Of course, most small private colleges are now discounting their tuition rates for entering freshmen--on average, first-year students are only paying about 50 percent of the sticker price.  But slashing tuition fees has not lured enough customers for many small colleges to keep their enrollments up.

I don't know enough about St. Catharine's situation to determine whether DOE treated the college unfairly. DOE may have had good reasons for putting St. Catharine on its "Heightened Cash Scrutiny" list. But it is fair to say that DOE's intensive meddling in college affairs has increased administrative costs for American colleges and universities.  Small institutions--colleges with less than a thousand students--simply can't afford the mounting costs of complying with federal mandates.

For a major public university, new  DOE mandates are manageable.  The University of Texas, for example, can hire additional administrators to comply with federal regulations; and it has a battalion of lawyers who can draft updated university policies to comply with new federal regulations that are spewed out of Washington.

But the little colleges simply can't afford the cost of complying with ever more intrusive federal regulations--FERPA, the Clery Act, Title IX, Section 504, etc.  And one by one, small liberal arts colleges will begin closing.

I foresee the day when American higher education will consist of three sectors: 1) secular public institutions, for-profit colleges, and elite private colleges and universities that have large endowments. Small liberal arts colleges, once a respected and important segment of American higher education, will soon be a thing of the past.

St. Catharine College is in receivership

References

Paul Fain. St. Catharine College Placed in Receivership. Inside Higher Ed, July 28, 2016. Accessible at https://www.insidehighered.com/quicktakes/2016/07/28/former-st-catharine-college-placed-receivership

Rick Howlett. St. Catharine College Closes Its Doors For the Final Time. WFPL, August 1, 2016. Accessible at http://wfpl.org/st-catharine-college-shutters-doors/

Kelly Woodhouse. (2015, November 25). Discount Much? Inside Higher Ed. Accessible at: https://www.insidehighered.com/news/2015/11/25/what-it-might-mean-when-colleges-discount-rate-tops-60-percent?utm_source=Inside+Higher+Ed&utm_campaign=389f6fe14e-DNU20151125&utm_medium=email&utm_term=0_1fcbc04421-389f6fe14e-198565653

Consumer Reports' article on student loan debt: A missed opportunity to give students some clear warnings

Consumer Reports' August issue ran a cover story on student loans, which led with this arresting quote: "I Kind of Ruined My Life By Going to College." An inside article profiled several students who were struggling to pay back enormous student loan debt.

• For example, Jackie Krowen borrowed $128,000 to attend three colleges. She now owes $152,000 and is making loan payments of $1200 a month.  She told Consumer Reports she didn't understand how much interest could accrue when she took out her loans.

• Jessie Suren borrowed $72,000 to attend a private Catholic school. She now owes $90,000 and makes payments of $900 a month. She works at a sales job that pays $39,000 a year. Here entire income comes from commissions.

• Saul Newton borrowed $10,000 to attend University of Wisconsin at Stevens Point. He dropped out to join the Army and now owes $23,000. He works as a veterans' activist making $28,800 a year.

 The Consumer Reports article pointed out hat 45 percent of people surveyed said that their college experience was not worth the cost, and 47 percent said if they had it to do over again they would have attended a cheaper school and incurred less student-loan debt.

Anyone making college plans should read the Consumers Reports story. Nevertheless, the article missed an opportunity to give potential students several dire warnings:

1) First, do not attend a for-profit college. The research shows that for-profit colleges charge more for their programs than public institutions, that their student-loan default rates are shockingly high, and that a high percentage of their students don't complete their programs. Students should find a public-college alternative to a for-profit college education. I don't think there are any exceptions to this rule.

2) Never allow a parent or loved one to co-sign a loan. Parents who co-sign student loans for their children are on the hook to pay those loans back, and it is as difficult for a co-signer to discharge a student loan in bankruptcy as it is for the primary borrower. If your college plans depends on getting a loved one to co-sign your student loans, then you need a different plan.

3) Don't take out a student loan from a private lender. Private loans generally have higher interest rates than federal loans, and private loans don't have alternative payment plans if a borrower gets in financial trouble and can't make monthly loan payments. Again, if your college plan requires you to take out a private loan, you need to make another plan.

4) Don't borrow a lot of money to obtain a liberal arts degree from a high-priced elite college. People foolishly think a degree from a prestigious university will pay off, no matter what major they choose. That is not true. A person who borrows $100,000 to get a religious studies degree from NYU will regret it.

5) Don't borrow money to get an MBA or law degree from a mediocre school, particularly if you know you are not going to graduate in the top of your class. Anyone contemplating law school should read Paul Campos' book titled Don't Go to Law School(Unless). Campos strongly warns against borrowing money to attend a second- or third-tier law school. It just doesn't make economic sense given the dismal job market for lawyers, particularly if you don't graduate in the top of your class. In my opinion, the same advice holds for MBA programs. Borrowing a lot of money to get an MBA from a nondescript university is unlikely to pay off financially.

In his book, Paul Campos also warned against the "Special Snowflake Syndrome"--the irrational belief that you can beat the odds. For example, you may think you will study especially hard and graduate in the top 10 percent of your class. But Campos points out that 90 percent of law students don't graduate in the top 10 percent of their class.

Alternatively, you may think you are a special person with great interpersonal skills and that you will do well in a law career even if you graduate at the bottom of your class from a mediocre law school. But statistics don't lie; most  people who borrow $150,000 to attend Nowhereville School of Law aren't going to earn a salary that will make that investment pay off.

Campos' advice for prospective law students applies to everyone going to college. Do your research and make an informed decision about where to go to school and what to study. Don't assume the world will be your oyster simply because you have a bachelor's degree in multiculturalism from a hot-shot Eastern college.

In summary, you should read the recent Consumer Reports story if you are making plans to go to college. But you should also heed the warnings in this blog. Millions of people made bad decisions about financing their college educations. Five million are now in long-term income-based repayment plans that stretch their monthly loan payments out for 20 and even 25 years.

You want to improve your life by going to college; you don't want to wind up as a sharecropper--paying a percentage of your income to the government for the majority of your working life just because you made some bad financial decisions when you were a college freshman.

References

Paul Campos. (2012). Don't Go to College (Unless). Lexington, KY). 

Lives on Hold. Consumer Reports, August 2016, 29-39. Accessible at http://www.consumerreports.org/student-loan-debt-crisis/lives-on-hold/

The Department of Education has 517 colleges on its"Heightened Cash Monitoring" list due to perceived risks to students and taxpayers: Is your college on the list?

The Department of Education recently released its updated list of colleges that are targeted for "heightened cash monitoring" due DOE concerns about risks these colleges pose to students or taxpayers.  The latest list names 517 colleges, slightly down from the 528 colleges that were on the list in March of 2015. Colleges on the list get more intense federal oversight than other schools.

How does a college get on this list? There are a variety of reasons, including accrediting problems, audit concerns and "financial responsibility," an umbrella term DOE uses to  cover a range of financial issues.

Not surprisingly, a majority of the colleges on the list are proprietary schools, including such esteemed institutions as Toni & Guy Hairdressing Academy and Educators of Beauty College of Cosmetology. But there were 81 public institutions on the "heightened cash monitoring" list, including regional colleges like University of North Alabama and Southwest Minnesota State University.

And DOE flagged no fewer than 40 foreign institutions for heightened cash monitoring, including Hebrew University in Jerusalem, London International Film School, and Pentecostal Theological Seminary in London.  A couple of Polish medical schools also made the list: Medical University of Gdansk and the Medical University of Silesia.

Quite a few nonprofit liberal arts colleges are on DOE's heightened cash monitoring list, including several schools with religious affiliations. It is difficult to tell how many private colleges have religious ties because a college's name may not give it away. Kuyper College in Grand Rapids, Michigan, for example, describes itself as a "minister focused Christian leadership college," but you have to go to the college's web site to find that out.

In fact, of the 32 colleges listed on the first page of DOE's print out of schools under heightened cash monitoring, 13 had some sort of religious tie or heritage, including Kentucky Wesleyan College, St. Catharine College, Eastern Nazarene College, and MacMurray College in Illinois, which was founded, according to its web site, by "devout and erudite Methodist clergymen."

Of course not all 517 colleges marked for enhanced cash monitoring will close. Most of the regional state universities on the list will probably muddle along indefinitely, propped up by state revenues.

But I think a lot of the schools on DOE's list will close. St. Catharine College is in receivership right now.

And what is the future of Shimer College in Chicago, which was recently ranked as one of the worst colleges in America and has only about 100 undergraduates? Shimer was founded in 1853 as Mount Carroll Seminary. Over time, the school evolved to become what it is today, a college that exists on two floors of a rented building and has no clubs or student societies. In 2012 it was ranked the second smallest college in America, after Alaska Bible College.

Of course, Shimer has its defenders and probably has many sterling qualities. Nevertheless, how long do you think Shimer College will last?

DOE's most recent list of colleges under "heightened cash scrutiny" should prompt us to ask several questions:

1) First, why is the federal government lending money for Americans to attend foreign colleges, including a couple of dozen foreign medical schools and several theological institutions? After all, our own country has more than 5,000 postsecondary institutions that participate in the federal student aid program, Does the government really need to finance foreign study?

2) A lot of for-profit schools are going to close in coming years.  Millions of students who attended these institutions received substandard educational experiences that did not lead to well-paying jobs.What should our government do to provide relief to the millions of people who took out loans to enroll in dodgy for-profit schools?

3) Hundreds of small liberal arts colleges are under financial stress, as evidenced by DOE's most recent "heightened cash scrutiny" list and by the escalating closure rate among these institutions. In terms of our nation's overall educational health, should we be concerned about the declining number of private liberal arts colleges, many of which are religiously affiliated?

One thing is certain. Hundreds of American postsecondary institutions, from Toni and Guy's Hairdressing Academy to Harvard, depend heavily on federal student aid money; and a great many colleges could not survive a week without regular infusions of federal funds. This has enabled colleges to hike their tuition rates and increase their annual budgets.

But the party is coming to an end. People have figured out that postsecondary education costs too much--whether it is obtained at a bottom-tier for-profit institution or an elite private liberal arts college. To fix this mess, we must do two things: We must drive down the cost of going to college, and we must provide bankruptcy relief for the millions of worthy souls who took out student loans in good faith and got very little to show for it.

Francis Wood Shimer,: founder of Shimer College

References

Scott Jaschik. Slight Drop in Colleges in Heightened Cash Monitoring. Inside Higher Education, July 25, 2016. Accessible at https://www.insidehighered.com/quicktakes/2016/07/25/slight-drop-colleges-heightened-cash-monitoring?utm_source=Inside+Higher+Ed&utm_campaign=8991789a59-DNU20160725&utm_medium=email&utm_term=0_1fcbc04421-8991789a59-198564813

Ben Miller. America's Worst Colleges. Washington Monthly, September/October 2014. Accessible at http://washingtonmonthly.com/magazine/septoct-2014/americas-worst-colleges/

Jon Ronson. Shimer College; the worst school in America? The Guardian, December 6, 2014. Accessible at https://www.theguardian.com/education/2014/dec/06/shimer-college-illinois-worst-school-america

Michael Stratford, Education Department will release list of colleges found to be risking for students, taxpayers. Inside Higher Education, March 30, 2015. Accessible at https://www.insidehighered.com/news/2015/03/30/education-department-will-release-list-colleges-found-be-risky-students-taxpayers

Amazon partners with Wells Fargo to peddle private student loans: Say it ain't so, Jeff Bezos

Amazon announced recently that it is partnering with Wells Fargo in the private student-loan business. The plan is for Wells Fargo to offer a slightly discounted interest rate to Amazon Prime Student members on Wells Fargo's private student loans.

 I was sorry to get this news. More than 50 years ago, American businesses discovered that they could rake in more cash from loaning money to their customers than from selling products. Prior to filing bankruptcy, for example, General Motors generated more profits from GMAC, its lending arm, than it did from selling cars.

In fact, the common joke at the time was that GM was not a car manufacturing company; it was a bank that happened to sell cars. And of course that slight change in focus from building quality automobiles to lending money at interest partly explains why GM went bankrupt.

Amazon already sells just about everything in the world. I recently purchased a couple of bags of wood chips for my electric smoker from Amazon; and I bought them cheaper than I could have gotten them at my local grocery store. Amazon's success has made Jeff Bezos, its founder, the third richest man in the world. He's worth about $65 billion.

Do Jeff and Amazon really need to get into the student loan business? Doesn't Jeff have enough money already?

But what is wrong with Amazon getting into the private student loan business, you might ask? What makes peddling student loans different from selling books, CDs, and appliances?

At least three things. First, most banks and lenders require student-loan borrowers to obtain a co-signer who will guarantee repayment of the loan. Thus, when Johnny and Sallie take out private student loans, Mom and Pop are also on the hook. In my opinion, it is reprehensible for banks to force students to get parents or relatives to cosign student loans.

Second, private loans generally carry higher interest rates than federal student loans, and they don't provide alternative payment options if a borrower runs into financial trouble and can't make monthly loan payments.  Without exception, people would be better off borrowing in the federal program than the private program.

Private lenders argue that they provide loans to people who need more money than they can borrow through the federal program.  But in my view, people who can't finance their educational program solely through federal loans are in the wrong program.

Finally, the banks managed to get Congress to revise the Bankruptcy Code in 2005 to make private loans as difficult to discharge in bankruptcy as federal loans. Senator Joe Biden was the chief architect of that sweetheart deal for the banks.

So if you take out a student loan from Wells Fargo and suffer a financial catastrophe, you will find it virtually impossible to discharge your Wells Fargo loan in bankruptcy. This is another good reason not to take out a private student loan.

In sum, the private student loan business is a sleazy industry. And so I ask again: Jeff Bezos, don't you have enough money already? Does Amazon really need to associate itself with the unsavory commerce in private student loans?

Jeff Bezos: Say it ain't so, Jeff

References

Ann Carne. Student Loan Co-Signers Face Tangled Path to a Release. New York Times, July 10, 2015. http://www.nytimes.com/2015/07/11/your-money/student-loan-co-signers-face-a-tangled-path-to-a-release.html

Karen Silke Carty. 7 Reasons GM is Headed to Bankruptcy. ABC News. Accessible at http://abcnews.go.com/Business/story?id=7721675&page=1

Annamaria Andriotis. Amazon tiptoes into the banking business through student loans. Wall Street Journal, July 21, 2016. Accessible at http://www.wsj.com/articles/amazon-tip-toes-into-banking-business-1469093403

Sirota, David. Joe Biden Backed Bills to Make It Harder For Americans To Reduce Their Student Debt. International Business Times, September 15 , 2015. Accessible: http://www.ibtimes.com/joe-biden-backed-bills-make-it-harder-americans-reduce-their-student-debt-2094664

A California court strikes an education provider's mandatory arbitration clause as being unconscionable: Magno v. The College Netwwork, Inc.

For years, for-profit colleges have required students to sign mandatory arbitration clauses as part of their student enrollment documents. These clauses prohibit students from suing the institutions they attended for fraud or misrepresentation. Instead, the clauses force students to arbitrate their claims in a forum that is often more favorable for the college than for the aggrieved student.

The Department of Education recently criticized this practice and is working on some regulations that will prohibit or sharply limit the ability of colleges to stick arbitration clauses in their enrollment documents. Last May, University of Phoenix  announced that it will abandon its practice of requiring students to sign arbitration agreements.

Magno v. The College Network, Inc.

Last month, a California appellate court invalidated the arbitration clause in a purchase agreement offered by The College Network, Inc., an education provider based in Indiana but operating in California.  Entitled Magno v. The College Network, Inc., the decision strikes a strong blow against a practice that has sharply limited the ability of college students to sue their for-profit colleges when they are hoodwinked by aggressive and misleading college recruiters.

Here are the facts of the case as outlined by the California Court of Appeals for the Fourth Appellate District:

Bernadette Magno, Rosanna Garcia, and Sheree Rudio were Licensed Vocational Nurses (LVNs) in California who sought to become Registered Nurses. A recruiting representative for The College Network Incorporated (TCN) encouraged the three to enroll in TCN's partnership with Indiana State University (ISU) and California State University (CSU). The recruiter told them they could complete much of the necessary coursework for a B.S. degree in Nursing through ISU's distance-learning program and complete their clinical training with CSU.

Magno and her companions signed up for the program, but they found out later that ISU had suspended its LVN to B.S. nursing program. They sued TCN in a California court for violation of California consumer-protection laws. They alleged that TCN concealed important information and falsely represented that enrolling in the TCN program would qualify them to enter ISU's nursing program.

TCN responded to the suit by asking a California trial court to compel the plaintiffs to arbitrate their claims in accordance with an arbitration clause in the purchase agreement each of them had signed. That agreement required Magno and her co-plaintiffs to arbitrate their claims in Indiana before an arbitrator chosen by TCN.

Fortunately, the trial court denied TCN's request, and the trial court's decision was upheld on appeal. The appellate court acknowledged that arbitration clauses are generally favored as a way to settle disputes.  Nevertheless, arbitration agreements will be struck down if they were both procedurally and substantively unconscionable.

The arbitration clause was procedurally unconscionable

As the court explained, an arbitration agreement is procedurally unconscionable if the weaker party lacks the ability to negotiate and has no meaningful choice but to sign the agreement or if the disadvantaged party was surprised by the arbitration clause.

In the California court's opinion, the arbitration clause was procedurally unconscionable
in both regards. "Plaintiffs were young, were rushed through the signing process, had no ability to negotiate, did not see the arbitration language 'buried on the back of the preprinted carbon paper forms,' and did not separately initial the arbitration clause."

Moreover, the plaintiffs testified that they were not sophisticated and that TCN's recruiter told them "how everything would be fine and to simply sign here and there." In addition, the recruiter told the plaintiffs they would get a discount if they signed right away. And the plaintiffs also testified that they were unaware of the arbitration clause until after they filed suit.

Based on this evidence, the appellate flatly court ruled that the arbitration clause was procedurally unconscionable. "The arbitration agreement is an adhesion contract; it lies within a standardized form drafted and imposed by a party with superior bargaining strength, leaving Plaintiffs with only the option of adhering to the contract or rejecting it."

The arbitration clause was substantively unconscionable

The court then looked at the language of the arbitration clause and found it to be substantively unconscionable as well because the clause was "unreasonably favorable to the more powerful party." First of all, the court pointed out, the clause required the plaintiffs, who were all California residents, to arbitrate their dispute with TCN in Indiana. This, in the court's view, was substantively unconscionable. After all, TCN solicited the  plaintiffs' business in California, and plaintiffs would not have reasonably expected to be forced to arbitrate their disputes with TCN in Indiana.

Nor was the clause less pernicious because it permitted the plaintiffs to participate in the arbitration by phone or video. This forced Magno and her co-plaintiffs to "choose whether to incur significant expenses to pursue their claims in an unreasonable forum or to appear remotely, foregoing the ability to testify in person, while TCN, a company that solicited business in California, participates in proceedings in its own backyard."

Also unconscionable in the court's opinion was the provision that TCN got to unilaterally choose the arbitrator. Although plaintiffs were permitted to withhold their consent to TCN's choice so long as consent was "not unreasonably withheld," that did not alter the fact that TCN had the unilateral right to select the arbitrator.

Finally, the appellate court pointed out that the arbitration clause required the plaintiffs to present their claims within one year, while California consumer protection laws gave plaintiffs much longer to present their claims. In the court's opinion, this was yet another indication that the clause was substantively unconscionable.

Conclusion: The Magno opinion is a win for the good guys

Magno v. The College Network, Inc. is a win for the good guys. All over the United States, for-profit colleges have forced students to waive their right to file lawsuits for fraud or misrepresentation by forcing them to arbitrate their claims in forums generally more favorable to the colleges.

Not all of these arbitration clauses are as unfair as the one TCN was cramming down students' throats, but most are fundamentally unfair. The Magno decision is good ammunition for students who attended for-profit colleges and wish to sue the institutions they attended for fraud or misrepresentation under state consumer-protection laws.

References

Magno v. The College Network, Inc.. (Cal. Ct. App. 2016). Accessible at http://caselaw.findlaw.com/ca-court-of-appeal/1741812.html

U.S. Department of Education. U.S. Department of Education Takes Further Steps to Protect Students from Predatory Higher Education Institutions. March 11, 2016. Accessible at http://www.ed.gov/news/press-releases/us-department-education-takes-further-steps-protect-students-predatory-higher-education-institutions?utm_content=&utm_medium=email&utm_name=&utm_source=govdelivery&utm_term=

News Release. Apollo Education Group to Eliminate Mandatory Arbitration Clauses. May 19, 2016.
Accessible at http://phx.corporate-ir.net/phoenix.zhtml?c=79624&p=irol-newsArticle&ID=2169809