The federal student loan program is a metaphorical train wreck--the wreck of a passenger train crowded with hapless commuters. The injured are strewn all over the landscape waiting to be treated.
If President Obama were a compassionate man, he would introduce legislation to assist the people who have been hurt by their participation in the federal student loan program. But he's not doing that. To extend the train-wreck metaphor further, Obama wants to close his eyes to the carnage on the railroad tracks and focus all his attention on designing a safer railroad car.
The President has done nothing to ease the plight of millions of young people who are burdened by student-loan debt and can't find decent jobs. Instead, he is pushing a college rating system that supposedly will help students make better choices about where to attend college. And he also wants more students to sign up for long-term student-loan repayment plans.
Of course, everyone knows that the most egregious student-loan abuses involve the for-profit colleges, which have been accused of high-pressure recruiting tactics and misrepresentations about students' job prospects. From time to time former students have sued for-profit colleges under state consumer protection laws, seeking damages based on claims that they'd been ripped off.
But the for-profits have figured out a clever way to stop lawsuits against them. Many of them force students to sign arbitration agreements when they enroll. Under these agreements, students waive their right to sue the college, even if they later believe they were induced to enroll based on misrepresentations. Instead, students are forced to submit their claims to arbitration, which most often benefits the college, not the student. More on this later.
Ferguson v. Corinthian Colleges: Students at for-profit colleges are denied right to a jury trial
Here's a recent example. In Ferguson v. Corinthian Colleges, Inc., decided last August by the Ninth Circuit Court of Appeals, Kevin Ferguson and Sandra Muniz, former students at schools operated by Corinthian Colleges, Inc., sought to bring a class action law suit against Corinthian based on alleged misrepresentations. These were their claims, as outlined by the court:
The thrust of [the former students'] complaint was that Corinthian systematically misled prospective students in order to entice enrollment. Corinth allegedly misrepresented the quality of its education, its accreditation, the career prospects for its graduates, and the actual cost of education at one of its schools. Students were also allegedly misinformed about financial aid, which resulted in student loans that many could not repay. Corinthian also allegedly targeted veterans and military personnel specifically, so that it could receive funding through federal financial aid programs available to those people.
Unfortunately for Ferguson and Muniz, both had signed arbitration agreements with Corinthian or one of its subsidiaries as part of the admission process. Under these agreements, they waived the right to sue Corinthian and agreed to arbitrate any claims under the Federal Arbitration Act (FAA).
When Ferguson and Muniz sued in federal court, Corinthian moved to dismiss their case on the grounds that they were compelled to arbitrate. A federal judge granted Corinthian's motion in part but allowed the former students to seek an injunction against Corinthian in federal court.
On appeal, the Ninth Circuit reversed, ruling that all claims against Corinthian must be arbitrated, including any request for injunctive relief. The Federal Arbitration Act "reflects an 'emphatic federal policy' in favor of arbitration," the court said. Under the Supremacy Clause of the United States Constitution, "the FAA preempts contrary state law" and prevents the states from allowing a party to go to court to resolve claims that the party had previously agreed to submit to arbitration.
Why is Ferguson v. Corinthian Colleges, Inc. a bad decision for students?
Why do the for-profits require students to sign arbitration agreements as a condition of enrolling? Forcing dissatisfied students to arbitrate their claims is advantageous to the corporate universities because students must pay a part of the arbitrator's cost, something many students can't afford to do. In addition, the for-profits prefer to go before an arbitrator rather than a jury, which might be quite sympathetic to a student's claim that he or she was induced to enroll in a for-profit college based on false promises and misrepresentations.
Moreover, arbitrators generally do not award punitive damages, their power to grant injunctive relief is limited if not non-existent, and an arbitrator's decision is usually private and not subject to public inspection. No wonder the for-profits require their students to sign agreements promising to arbitrate their complaints and not file lawsuits.
Congress should pass a law barring for-profit colleges from forcing students to sign arbitration agreements
Under the Federal Arbitration Act, as interpreted by the U.S. Supreme Court, states do not have the authority to allow ripped-off students to sue for-profit colleges under state consumer-protection laws if those students signed arbitration agreements, which many of them are forced to do as a condition of enrolling in a for-profit college. This is wrong.
President Obama should introduce legislation that prohibits for-profit colleges from forcing students to sign arbitration agreements and specifically permits students to sue for-profit colleges for fraud or misrepresentation under appropriate state consumer-protection laws. The legislation should give students the right to a jury trial, and prevailing students should receive attorney fees and punitive damages when appropriate.
Of course, President Obama will never introduce such legislation, and Congress would never pass it if he did. The for-profits are too politically powerful for such a law ever to be adopted.
Rather than tackle the abuses in the for-profit college industry, President Obama prefers to introduce a complicated and toothless rating system for colleges--a rating system that will do nothing to reduce the harm so many students suffer when they borrow money to attend a for-profit college or university.
Ferguson v. Corinthian Colleges, Inc., 733 F.3d 928 (9th Cir. 2013).