The U.S. Department of Education recently announced proposed regulations designed to expand and improve the major student loan discharge programs authorized by the Higher Education Act. Among other things, the proposed regulations would prohibit institutions that participate in the Federal Direct Loan program from requiring borrowers to sign mandatory pre-dispute arbitration agreements or class-action waivers. The Department’s purported justification for prohibiting arbitration comes from Section 454 of the federal Higher Education Act, 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 proposed arbitration ban is based on its “experience in the student loan area” and a potpourri 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 “significant 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; and arbitration records are sealed from public view.
However, nothing argued by the Department authorizes 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.”
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 these student loan agreements. And the Department knows that. Indeed, it has expressly acknowledged that “it lacks the authority … to displace or diminish the effect of the FAA.” But that is precisely what the Department’s proposed regulations would do.
Moreover, the year before Epic Systems, Congress disapproved regulations issued by the Consumer Financial Protection Bureau (CFPB) that would have prohibited the use of class action waivers in pre-dispute consumer arbitration provisions. The overturned CFPB Rule was the culmination of a multi-year empirical study of consumer arbitration that was specifically authorized by Congress. The Department, however, acknowledges that it is not aware of any study that has “addressed arbitration in the context of higher education and student loans.”
The Department’s proposed regulation constitutes administrative overreach. Just last month, in West Virginia v. EPA, the U.S. Supreme Court held that “something more than a merely plausible textual basis for the agency action is necessary. The agency instead must point to ‘clear congressional authorization’ for the power it claims.” What is conspicuously absent here is any “clear congressional authorization” in the Higher Education Act that would permit the Department to effectively amend the FAA by exempting certain student loans. If such “clear congressional authorization” existed, the Department would not need to rely on its “experience” and on a bevy of public policy arguments for justifying its proposed regulations. The Department may prefer to have student loan disputes resolved by class actions rather than individual arbitration, but it lacks the power to impose that rule on the institutions it regulates.