UNITED STATES DEPARTMENT OF EDUCATION

 OFFICE OF POSTSECONDARY EDUCATION

Issue Paper #9: Predispute Arbitration and Class Action Waivers

Session 1: October 4-8, 2021

Issue: Predispute Arbitration and Class Action Waivers

Statutory cites: §454(a)(6) of the Higher Education Act of 1965, as amended

Regulatory cites: 34 CFR 685.300

Summary of issues: The Higher Education Act of 1965, as amended (HEA), gives the Secretary the 

authority to impose conditions on institutions that wish to participate in the William D. Ford Direct Loan 

(Direct Loan) Program. Institutions that participate in the Direct Loan Program must enter into a

program participation agreement (PPA). Specifically, Section 454(a)(6) of the HEA authorizes the 

Secretary to include in that PPA “provisions that the Secretary determines are necessary to protect the 

interest of the United States and to promote the purposes of” the Direct Loan Program.

In 2016, the Department added specific provisions to the PPA related to student claims and complaints 

based upon an institution’s acts or omissions that were: (1) related to the making of a Direct Loan or the 

provision of educational services for which the Direct Loan was provided; and, (2) could form the basis 

of borrower defense claims. Specifically, the Department prohibited institutions participating in the 

Direct Loan Program from using certain contractual provisions regarding dispute resolution processes, 

such as predispute arbitration agreements or class action waivers, and to require institutions to notify 

and disclose their use of arbitration. In 2019, the Department rescinded the prohibition of predispute 

arbitration agreements and class action waivers.

The Department observed the following issues and problems around predispute arbitration and class 

action waivers:

• Institutions may use arbitration clauses in enrollment agreements to effectively discourage

students from pursuing complaints. This enables an institution to avoid financial risk associated 

with its wrongdoing and shift the risk to the taxpayers and federal government through 

subsequent borrower defense discharges;

• Borrowers cannot have their day in court because some enrollment agreements prevent their 

ability to participate in lawsuits, including class action litigation. This further insulates 

institutions from the potential financial risk of their wrongdoing; and,

• Lack of transparency surrounding institutions’ arbitration requirements and limits on class 

actions.

Solution: 

The Department believes that students should have an opportunity to have their day in court or pursue 

other pathways for resolving their complaints that are related to conduct that could result in a borrower 

defense claim. The Department also believes that keeping such information hidden from public view 
Predispute Arbitration and Class Action Waivers 2

may hinder the Department’s ability to investigate quickly when there are patterns of student 

complaints. To accomplish these goals, the Department proposes the following initial solutions to the 

issues identified above for discussion with the negotiating committee:

Prohibit Direct Loan-participating institutions from using certain contractual provisions regarding 

dispute resolution processes, and to require certain notifications and disclosures by institutions 

regarding their use of arbitration. The Department proposes to restore the 2016 regulations and 

prohibit institutions from obtaining, through the use of contractual provisions or other agreements, a 

predispute agreement for arbitration to resolve claims brought by a borrower against the institution

that could form the basis of a borrower defense claim. The Department proposes to restore prohibitions 

on institutions obtaining an agreement, either in an arbitration agreement or in another form, that a 

borrower waive his or her right to initiate or participate in a class action lawsuit regarding such claims 

and from requiring students to engage in internal dispute processes before contacting accrediting or 

government agencies with authority over the school regarding such claims. The Department also 

proposes requiring institutions to notify the Department and to disclose to students the institution's use 

of arbitration on acts or omissions related to the making of a Direct Loan or the provision of educational 

services for which the Direct Loan was provided, and to provide judicial and arbitral records to the 

Department, which will be shared with the public.

Proposed Regulations:

To assist the Committee in discussing these issues, the Department is providing draft revisions to the 

regulatory language for the issues described above and incorporating the Department’s proposals.

§685.300 Agreements between an eligible school and the Secretary for participation in the Direct 

Loan Program.

(a) General. Participation of a school in the Direct Loan Program means that eligible students at 

the school may receive Direct Loans. To participate in the Direct Loan Program, a school must—

(1) Demonstrate to the satisfaction of the Secretary that the school meets the requirements for 

eligibility under the Act and applicable regulations; and

(2) Enter into a written program participation agreement with the Secretary.

(b) Program participation agreement. In the program participation agreement, the school must 

promise to comply with the Act and applicable regulations and must agree to—

(1) Identify eligible students who seek student financial assistance at the institution in 

accordance with section 484 of the Act;

(2) Estimate the need of each of these students as required by part F of the Act for an academic 

year. For purposes of estimating need, a Direct Unsubsidized Loan, a Direct PLUS Loan, or any loan 

obtained under any State-sponsored or private loan program may be used to offset the expected family 

contribution of the student for that year;
Predispute Arbitration and Class Action Waivers 3

(3) Certify that the amount of the loan for any student under part D of the Act is not in excess of 

the annual limit applicable for that loan program and that the amount of the loan, in combination with 

previous loans received by the borrower, is not in excess of the aggregate limit for that loan program;

(4) Set forth a schedule for disbursement of the proceeds of the loan in installments, consistent 

with the requirements of section 428G of the Act;

(5) On a monthly basis, reconcile institutional records with Direct Loan funds received from the 

Secretary and Direct Loan disbursement records submitted to and accepted by the Secretary;

(6) Provide timely and accurate information to the Secretary for the servicing and collecting of 

loans—

(i) Concerning the status of student borrowers (and students on whose behalf parents borrow) 

while these students are in attendance at the school;

(ii) Upon request by the Secretary, concerning any new information of which the school 

becomes aware for these students (or their parents) after the student leaves the school; and

(iii) Concerning student eligibility and need, for the alternative origination of loans to eligible 

students and parents in accordance with part D of the Act;

(7) Provide assurances that the school will comply with requirements established by the 

Secretary relating to student loan information with respect to loans made under the Direct Loan 

Program;

(8) Accept responsibility and financial liability stemming from its failure to perform its functions 

pursuant to the agreement;

(9) Provide for the implementation of a quality assurance system, as established by the 

Secretary and developed in consultation with the school, to ensure that the school is complying with 

program requirements and meeting program objectives;

(10) Provide that the school will not charge any fees of any kind, however described, to student 

or parent borrowers for origination activities or the provision of any information necessary for a student 

or parent to receive a loan under part D of the Act or any benefits associated with such a loan;

(11) Comply with the provisions of paragraphs (d) through (i) of this section regarding student 

claims and disputes; 

(1112) Comply with other provisions that the Secretary determines are necessary to protect the 

interests of the United States and to promote the purposes of part D of the Act; and

(1213) Accept responsibility and financial liability stemming from losses incurred by the 

Secretary for repayment of amounts discharged by the Secretary pursuant to §§685.206, 685.214, 

685.215, 685.216, and 685.222.
Predispute Arbitration and Class Action Waivers 4

(c) Origination. A school that originates loans in the Direct Loan Program must originate loans to 

eligible students and parents in accordance with part D of the Act. The note or evidence of the 

borrower's obligation on the loan originated by the school is the property of the Secretary.

(d) Borrower defense claims in an internal dispute process. The school will not compel any 

student to pursue a complaint based on allegations that would provide a basis for a borrower defense 

claim through an internal dispute process before the student presents the complaint to an accrediting 

agency or government agency authorized to hear the complaint. 

(e) Class action bans. 

(1) The school will not seek to rely in any way on a predispute arbitration agreement or on any 

other predispute agreement with a student who has obtained or benefited from a Direct Loan, with 

respect to any aspect of a class action that is related to a borrower defense claim, including to seek a 

stay or dismissal of particular claims or the entire action, unless and until the presiding court has ruled 

that the case may not proceed as a class action and, if that ruling may be subject to appellate review on 

an interlocutory basis, the time to seek such review has elapsed or the review has been resolved. 

(2) Reliance on a predispute arbitration agreement, or on any other predispute agreement, with 

a student, with respect to any aspect of a class action includes, but is not limited to, any of the following: 

(i) Seeking dismissal, deferral, or stay of any aspect of a class action. 

(ii) Seeking to exclude a person or persons from a class in a class action. 

(iii) Objecting to or seeking a protective order intended to avoid responding to discovery in a 

class action. 

(iv) Filing a claim in arbitration against a student who has filed a claim on the same issue in a 

class action. 

(v) Filing a claim in arbitration against a student who has filed a claim on the same issue in a 

class action after the trial court has denied a motion to certify the class but before an appellate court 

has ruled on an interlocutory appeal of that motion, if the time to seek such an appeal has not elapsed 

or the appeal has not been resolved. 

(vi) Filing a claim in arbitration against a student who has filed a claim on the same issue in a 

class action after the trial court in that class action has granted a motion to dismiss the claim and, in 

doing so, the court noted that the consumer has leave to refile the claim on a class basis, if the time to 

refile the claim has not elapsed. 

(3) Required provisions and notices: 

(i) The school must include the following provision in any agreements with a student recipient of 

a Direct Loan for attendance at the school, or, with respect to a Parent PLUS Loan, a student for whom 

the PLUS loan was obtained, that include any agreement regarding predispute arbitration or any other 
Predispute Arbitration and Class Action Waivers 5

predispute agreement addressing class actions and that are entered into after the effective date of this 

regulation: “We agree that neither we nor anyone else will use this agreement to stop you from being 

part of a class action lawsuit in court. You may file a class action lawsuit in court or you may be a 

member of a class action lawsuit even if you do not file it. This provision applies only to class action 

claims concerning our acts or omissions regarding the making of the Direct Loan or the provision by us 

of educational services for which the Direct Loan was obtained. We agree that only the court is to decide 

whether a claim asserted in the lawsuit is a claim regarding the making of the Federal Direct Loan or the 

provision of educational services for which the loan was obtained.” 

(ii) When a predispute arbitration agreement or any other predispute agreement addressing 

class actions has been entered into before the effective date of this regulation and does not contain a 

provision described in paragraph (e)(3)(i) of this section, the school must either ensure the agreement is 

amended to contain the provision specified in paragraph (e)(3)(iii)(A) of this section or provide the 

student to whom the agreement applies with the written notice specified in paragraph (e)(3)(iii)(B) of 

this section. 

(iii) The school must ensure the agreement described in paragraph (e)(3)(ii) of this section is 

amended to contain the provision specified in paragraph (e)(3)(iii)(A) of this section or must provide the 

notice specified in paragraph (e)(3)(iii)(B) of this section to students no later than the exit counseling 

required under § 685.304(b), or the date on which the school files its initial response to a demand for 

arbitration or service of a complaint from a student who has not already been sent a notice or 

amendment. 

(A) Agreement provision. “We agree that neither we nor anyone else who later becomes a party 

to this agreement will use it to stop you from being part of a class action lawsuit in court. You may file a 

class action lawsuit in court or you may be a member of a class action lawsuit in court even if you do not 

file it. This provision applies only to class action claims concerning our acts or omissions regarding the 

making of the Federal Direct Loan or the provision by us of educational services for which the Federal 

Direct Loan was obtained. We agree that only the court is to decide whether a claim asserted in the 

lawsuit is a claim regarding the making of the Federal Direct Loan or the provision of educational 

services for which the loan was obtained.” 

(B) Notice provision. “We agree not to use any predispute agreement to stop you from being 

part of a class action lawsuit in court. You may file a class action lawsuit in court or you may be a 

member of a class action lawsuit even if you do not file it. This provision applies only to class action 

claims concerning our acts or omissions regarding the making of the Federal Direct Loan or the provision 

by us of educational services for which the Federal Direct Loan was obtained. We agree that only the 

court is to decide whether a claim asserted in the lawsuit is a claim regarding the making of the Federal 

Direct Loan or the provision of educational services for which the loan was obtained.”

(f) Predispute arbitration agreements. 

(1) 
Predispute Arbitration and Class Action Waivers 6

(i) The school will not enter into a predispute agreement to arbitrate a borrower defense claim, 

or rely in any way on a predispute arbitration agreement with respect to any aspect of a borrower 

defense claim. 

(ii) A student may enter into a voluntary post-dispute arbitration agreement with a school to 

arbitrate a borrower defense claim. 

(2) Reliance on a predispute arbitration agreement with a student with respect to any aspect of 

a borrower defense claim includes, but is not limited to, any of the following: 

(i) Seeking dismissal, deferral, or stay of any aspect of a judicial action filed by the student, 

including joinder with others in an action; 

(ii) Objecting to or seeking a protective order intended to avoid responding to discovery in a 

judicial action filed by the student; and 

(iii) Filing a claim in arbitration against a student who has filed a suit on the same claim. 

(3) Required provisions and notices: 

(i) The school must include the following provision in any predispute arbitration agreements 

with a student recipient of a Direct Loan for attendance at the school, or, with respect to a Parent PLUS 

Loan, a student for whom the PLUS loan was obtained, that include any agreement regarding arbitration 

and that are entered into after the effective date of this regulation: “We agree that neither we nor 

anyone else will use this agreement to stop you from bringing a lawsuit concerning our acts or omissions 

regarding the making of the Federal Direct Loan or the provision by us of educational services for which 

the Federal Direct Loan was obtained. You may file a lawsuit for such a claim or you may be a member of 

a class action lawsuit for such a claim even if you do not file it. This provision does not apply to lawsuits 

concerning other claims. We agree that only the court is to decide whether a claim asserted in the 

lawsuit is a claim regarding the making of the Federal Direct Loan or the provision of educational 

services for which the loan was obtained.” 

(ii) When a predispute arbitration agreement has been entered into before the effective date of 

this regulation that did not contain the provision specified in paragraph (f)(3)(i) of this section, the 

school must either ensure the agreement is amended to contain the provision specified in paragraph 

(f)(3)(iii)(A) of this section or provide the student to whom the agreement applies with the written 

notice specified in paragraph (f)(3)(iii)(B) of this section. 

(iii) The school must ensure the agreement described in paragraph (f)(3)(ii) of this section is 

amended to contain the provision specified in paragraph (f)(3)(iii)(A) of this section or must provide the 

notice specified in paragraph (f)(3)(iii)(B) of this section to students no later than the exit counseling 

required under § 685.304(b), or the date on which the school files its initial response to a demand for 

arbitration or service of a complaint from a student who has not already been sent a notice or 

amendment. 
Predispute Arbitration and Class Action Waivers 7

(A) Agreement provision. “We agree that neither we nor anyone else who later becomes a party 

to this predispute arbitration agreement will use it to stop you from bringing a lawsuit concerning our 

acts or omissions regarding the making of the Federal Direct Loan or the provision by us of educational 

services for which the Federal Direct Loan was obtained. You may file a lawsuit for such a claim or you 

may be a member of a class action lawsuit for such a claim even if you do not file it. This provision does 

not apply to other claims. We agree that only the court is to decide whether a claim asserted in the 

lawsuit is a claim regarding the making of the Federal Direct Loan or the provision of educational 

services for which the loan was obtained.” 

(B) Notice provision. “We agree not to use any predispute arbitration agreement to stop you 

from bringing a lawsuit concerning our acts or omissions regarding the making of the Federal Direct 

Loan or the provision by us of educational services for which the Federal Direct Loan was obtained. You 

may file a lawsuit regarding such a claim or you may be a member of a class action lawsuit regarding 

such a claim even if you do not file it. This provision does not apply to any other claims. We agree that 

only the court is to decide whether a claim asserted in the lawsuit is a claim regarding the making of the 

Direct Loan or the provision of educational services for which the loan was obtained.”

(g) Submission of arbitral records. 

(1) A school must submit a copy of the following records to the Secretary, in the form and 

manner specified by the Secretary, in connection with any claim filed in arbitration by or against the 

school concerning a borrower defense claim: 

(i) The initial claim and any counterclaim. 

(ii) The arbitration agreement filed with the arbitrator or arbitration administrator. 

(iii) The judgment or award, if any, issued by the arbitrator or arbitration administrator. 

(iv) If an arbitrator or arbitration administrator refuses to administer or dismisses a claim due to 

the school's failure to pay required filing or administrative fees, any communication the school receives 

from the arbitrator or arbitration administrator related to such a refusal. 

(v) Any communication the school receives from an arbitrator or an arbitration administrator 

related to a determination that a predispute arbitration agreement regarding educational services 

provided by the school does not comply with the administrator's fairness principles, rules, or similar 

requirements, if such a determination occurs. 

(2) A school must submit any record required pursuant to paragraph (g)(1) of this section within 

60 days of filing by the school of any such record with the arbitrator or arbitration administrator and 

within 60 days of receipt by the school of any such record filed or sent by someone other than the 

school, such as the arbitrator, the arbitration administrator, or the student.

(h) Submission of judicial records. 
Predispute Arbitration and Class Action Waivers 8

(1) A school must submit a copy of the following records to the Secretary, in the form and 

manner specified by the Secretary, in connection with any claim concerning a borrower defense claim 

filed in a lawsuit by the school against the student or by any party, including a government agency, 

against the school: 

(i) The complaint and any counterclaim. 

(ii) Any dispositive motion filed by a party to the suit; and 

(iii) The ruling on any dispositive motion and the judgment issued by the court. 

(2) A school must submit any record required pursuant to paragraph (h)(1) of this section within 

30 days of filing or receipt, as applicable, of the complaint, answer, or dispositive motion, and within 30 

days of receipt of any ruling on a dispositive motion or a final judgment.

(i) (i) Definitions. For the purposes of paragraphs (d) through (h) of this section, the term -

(1) “Borrower defense claim” means a claim that is or could be asserted as a borrower defense 

as defined in § 685.222(a)(5), including a claim other than one based on § 685.222(c) or (d) that may be 

asserted under § 685.222(b) if reduced to judgment; 

(2) “Class action” means a lawsuit in which one or more parties seek class treatment pursuant to 

Federal Rule of Civil Procedure 23 or any State process analogous to Federal Rule of Civil Procedure 23; 

(3) “Dispositive motion” means a motion asking for a court order that entirely disposes of one or 

more claims in favor of the party who files the motion without need for further court proceedings; 

(4) “Predispute arbitration agreement” means any agreement, regardless of its form or 

structure, between a school or a party acting on behalf of a school and a student providing for 

arbitration of any future dispute between the parties.

Last updated 9/29/2021