Corinthian Colleges used forced arbitration to keep harmed students from getting their due for years
Earlier this month, the U.S. Department of Education announced it will forgive $5.8 billion of federal student loans for 560,000 students who attended the now-shuttered for-profit Corinthian Colleges. The announcement marks a hard-won major victory for over half a million defrauded students and a conclusion to the long-running saga of Corinthian’s collapse and its aftermath. As we celebrate justice for the students that Corinthian ripped off, it is hard to ignore how Corinthian used forced arbitration requirements in its student enrollment contracts to prolong its demise for years by covering up its fraud and deception and keeping relief out of reach for borrowers.
At its peak in 2010, Corinthian Colleges enrolled over 100,000 students at campuses across the country while raking in massive profits, mostly from federal student loans. Its recruiters reportedly targeted vulnerable, low-income adults with aggressive sales pitches and promises of better job prospects and high career-placement rates. However, most of these promises were shown to be false. Corinthian had allegedly perpetuated multiple schemes to falsely inflate its job placement statistics and the training it provided was allegedly low-quality and did not adequately prepare students for future careers.
By 2014, Corinthian had come under the scrutiny of 20 state Attorneys General as well as the Consumer Financial Protection Bureau, Department of Education, Department of Justice, and Securities and Exchange Commission for its long-list of alleged shady practices. The writing was seemingly on the wall when the Department of Education announced a temporary hold on federal loan disbursement to Corinthian institutions. Shortly afterwards, Corinthian announced its intention to file for bankruptcy, leaving 72,000 students in the dust with no degrees while still saddled massive debt, and taxpayers on the hook for up to a billion in loans.
Could this desperate situation that tens of thousands of deceived, heavily indebted students suddenly found themselves in have been prevented or at least mitigated? In a world without forced arbitration, yes.
Corinthian’s enrollment contracts included a provision in the fine print that forced students to surrender their right to bring claims against Corinthian before a judge and jury. Instead, they were required take their complaints to closed-door arbitration to be decided by private arbitrators who are not bound to follow the law and whose decisions often cannot be appealed.
While corporations will claim that they use forced arbitration because it is cheaper, faster, and therefore better for consumers, the truth is that they use it to suppress claims against them. Due to the secretive nature of arbitration, cases brought rarely make it to public awareness and can’t tip off regulators or others who may have suffered similar harms until the practice becomes widespread. Further, forced arbitration often heavily discourages claims from being brought in the first place, primarily by preventing harmed students and other claimants from banding together to challenge systemic wrongdoing.
Corinthian, which also prohibited students from joining their claims together, successfully silenced large groups of former students. In a case brought in 2005, before the earliest government probes into Corinthian, a group of students claimed that Corinthian had misled them about their program’s accreditation status and provided inadequate instruction. Notably, these accusations were remarkably similar to those later made by the many official investigations of Corinthian. Because most of the students involved had signed enrollment contracts with forced arbitration clauses, the court compelled their individual cases into arbitration.
Similarly, in a 2011 case, a group of former students attempted to bring a class action against Corinthian alleging deceptive marketing about accreditation, job placement, and cost. Most of the students had signed enrollment contracts with forced arbitration clauses and class action bans. As a result, the case could not proceed, and the students were kicked out of court and into individual arbitration where their claims were unlikely to see the light of day.
With many suits against Corinthian going nowhere, students also attempted to seek relief by pursuing claims against servicers of loans connected to Corinthian’s private student loan program to cancel all Corinthian private loan debt held by the servicers. However, students faced similar obstacles to remedies. Like Corinthian’s enrollment contracts, the terms of the private loans also contained a forced arbitration clause which the servicers successfully used to remove the case from court, leaving the public with no information on how the case was resolved.
The cheated students’ long fight for accountability notably took place against a background of the Supreme Court aggressively expanding the strength and scope of the Federal Arbitration Act (FAA). In 2011, the Court issued its decision in AT&T Mobility v. Concepcion where it held that under the FAA, forced arbitration clauses in contracts that also banned groups of people from banding together in a legal action were permissible and preempted the state laws. Previously, many courts around the country interpreting state laws had held that class action bans were “unconscionable.” Two years later, the Supreme Court took its pro-forced arbitration stance further in American Express v. Italian Colors when it ruled that a class action ban was enforceable even if it would effectively insulate a corporation from claims.
Fortunately, former Corinthian students will no longer be facing an uphill battle to seek relief. After the years of systemic and widespread harm and the public investigations, cheated Corinthian students will get their due now that the Department of Education’s has decided to automatically forgive their federal loans. Additionally, in a just-announced class-action settlement with the Department of Education, 200,000 federal student loan borrowers who filed claims under the Department of Education’s Borrwer Defense to Repayment Rule against for-profit schools that similarly deceived and cheated them, will also receive automatic forgiveness of about $6 billion in student loans.
The Borrower Defense Rule, which has gone through multiple iterations in the last several years, was intended to help students access justice against predatory for-profit schools, including with limits on the use of forced arbitration. The Borrower Defense Rule of 2016 included a regulation that would prohibit schools from participating in federal loan programs if they used forced arbitration clauses to shield themselves from borrower defense claims such as false advertising and deceptive recruiting. The final rule, which was published in October 2016, went into effect in July 2017.
However, students’ attempts to avail themselves of the Rule’s protections encountered serious difficulties. Under the previous administration, the Department of Education refused to process hundreds of thousands of claims, including many made by former Corinthian students. The Department further frustrated the Rule when in 2019, it issued a revised rule which went effect on July 1, 2020. Under the current regulations, schools can still use forced arbitration against their students as long as the schools provide students with a plain-language disclosure about the arbitration clause. Due to the high-pressure recruitment tactics employed by many predatory for-profit colleges, disclosure is insufficient to protect vulnerable students. Last year, the Department commenced a public negotiated rulemaking process where it solicited feedback on multiple issues including borrower defense and forced arbitration.
The for-profit school industry serves as an example of how dangerous forced arbitration is for consumers, students, and taxpayers. Policymakers should continue to make decisive moves to prohibit or at least severely limit the use of forced arbitration provisions, and especially those that prohibit individuals from banding together in court.
