The U.S. Department of Education recently announced final regulations, effective July 1, 2023, designed to expand and improve the major student loan discharge programs authorized by the Higher Education Act. Among other things, the final regulations prohibit institutions that participate in the Federal Direct Loan program from requiring borrowers to sign mandatory pre-dispute arbitration agreements or class-action waivers that would be applicable to disputes about Direct Loans. The Department’s purported justification for prohibiting arbitration is a federal statute, 20 U.S.C. Section 1087d (a)(6), which authorizes the Secretary of Education to include in the regulations “provisions as the Secretary determines are necessary to protect the interest of the United States and to promote the purposes of” the Direct Loan Program.
The Department’s arbitration ban is based on its “actual experience in the student loan programs administered by the Department” and a miscellany of public policy arguments, including: if class actions are permitted, borrowers can pursue relief directly from the institution rather than relying on recovery from the federal taxpayers through discharge of their loans; class actions are a deterrent to unlawful conduct; arbitration stifles students’ ability to bring complaints to the attention of oversight bodies; class action waivers prevent borrowers from obtaining injunctive relief that would prevent harm to future borrowers; arbitration records are sealed from public view; and “the arbitration process [is] tilted in favor of the industry.”
We commented on the Department’s proposed regulations when they were issued last summer. The final regulations make no changes insofar as arbitration is concerned, so we reiterate the critical point we made then—none of the Department’s rationales in support of the arbitration prohibition authorize it to carve out these student loan agreements from the coverage of the Federal Arbitration Act (FAA). In a landmark 2018 decision, Epic Systems, Inc. v. Lewis, the U.S. Supreme Court held that in order for another federal statute to override the FAA, the other statute must “manifest a clear intention to displace” the FAA. In that case, the Court concluded that the National Labor Relations Act (NLRA) did not preclude the enforcement of arbitration provisions with class action waivers in employment agreements because the NLRA “does not express approval or disapproval of arbitration. It does not mention class or collective action procedures. It does not even hint at a wish to displace the Arbitration Act—let alone accomplish that much clearly and manifestly, as our precedents demand.” As the Court emphasized, “when Congress wants to mandate particular dispute resolution procedures it knows exactly how to do so.”
The Department expressly acknowledges that it “lacks authority … to displace or diminish the effect of the FAA.” But that is precisely what the Department’s final regulations do. Nothing in Section 1087d(a)(6) of the Higher Education Act “manifests a clear intention” by Congress to authorize the Department to prohibit the use of predispute arbitration agreements and class action waivers in student loan agreements. The Department brushes aside the “lack of authority” comments it received on the proposed regulations by stating, “[t]he Department respectfully disagrees with these commentators” and reiterating the text of Section 1087d(a)(6).
The Department has no issue with arbitration itself, as long as it is agreed to after a dispute has arisen, not before: “We recognize that arbitration may provide some potential efficiencies for institutions and consumers and the regulations do not discourage institutions from offering or promoting arbitration to complainants once a grievance is reported.” However, while post-dispute arbitration is a theory that may sound…