Student loan lenders are being unfairly blamed for student choices regarding schools that close.

Consider, if the student paid the school cash up front without resorting to a loan, what recourse would the student have when the school closed? Why should that recourse be any different if the student borrowed the money?

Essentially, this misguided public policy attempts to shift the financial burden from the student that choose the school that closed and that school to all other students, as lenders would have to charge a higher rate on everybody to cover the risk of such loses.

It is terrible that schools close and do not fulfill contractual service obligations, however sharing the liability of that potential across all schools and students is an undue burden upon those not party to that student-school relationship.

As for the disintegration of policy directives from various agencies causing disparate impact on lenders, such invalid governmental interference in contracts breeds these contradictions. The correction is not to blame the lenders but to eliminate the burdensome regulations and create a level system of rules based upon the protection of individual rights.

As for mediation provisions within contracts, this provides lower costs and faster resolutions of disputes to the benefit of students, who actually pay all such costs through fees and charges. Further, arbitration and mediation is promoted for dispute resolution in federal law. Contrary to the statement of the National Consumer Law Center’s report, arbitration rulings can be appealed in court on the basis of process defects. Instead of simply asserting process defects related to conflict of interest as the Center does, such claims can be addressed objectively in court through appeal.

If heeded, this piece’s call for more federal intervention regarding allegations that it labels as “predatory” will drive more private capital out of the education finance market. As such private capital empowers students left short by federal programs, this call can only be interpreted as advocating in effect to reduce students’ educational opportunities to those approved and directed by the federal government.

Self-proclaimed advocates for students need to be more attentive of the consequences of their wrong-headed suggestion, but more importantly advocate policies that increase students’ access to the capital, at reasonable prices, needed to fulfill those students’ educational goals.

Jim's comments misstate a number of key legal points.

First the FTC Holder rule is not open-ended. Instead, the notice must be inserted in a credit agreement whenever the seller finances the sale or if the creditor has a relationship with the seller and that creditor finances the sale. A relationship generally means that the seller either refers consumers to the creditor or is affiliated with the creditor by common control, contract or business arrangement. When we talk about students being entitled to relief from the lenders, we are talking about situations where the school and lender have some sort of business arrangement or other type of close connection. If enforced properly, this rule should deter lenders from developing these relationships with illegitimate and unlicensed schools.

Further, the creditor in these circumstances is liable only for claims that the student could raise against the school. Just providing a bad education generally does not give rise to a legal claim. The types of claims that a student can raise involve fraud, intentional misrepresentations, breach of contract etc. You ask what recourse a student would have if he paid cash? He would have these very same claims but against the school. The problem in these cases is that the school is usually long gone. The schools take the money and close and the students are left with nothing but huge debts. Note that recovery through the FTC Holder rule is limited as well. In addition to cancelling the indebtedness (all or part), the consumer can only recover in addition any amounts already paid on the debt. This is hardly a shifting of the financial burden from the student to the lender. Rather, it is an attempt to provide justice for a student who was misled into choosing a school that defrauded him/her by allowing recovery only against creditors that are connected to those fraudulent schools.

In response to the claims about arbitration, the truth is that consumers have only very limited rights to appeal binding arbitration decisions. These grounds generally involve evident miscalculations and other mostly technical grounds. The Federal Arbitration Act and Uniform Arbitration Act do not list any grounds to vacate an arbitration award based on its merits. The Supreme Court has softened this somewhat, recognizing the availability of judicial review of the merits of arbitration awards in some circumstances, but these circumstances are quite narrow. Some state courts do not recognize any of these grounds.

A major problem with mandatory arbitration is the severe imbalance of power and knowledge between consumers and creditors. There are many problems with requiring mandatory arbitration in these circumstances including the fact that the vast majority of arbitration clauses prohibit consumers from participating in or bringing class actions. There are also serious concerns about the impartiality of arbitrators. Arbitration work is often very lucrative and arbitrators know that if they rule against a corporate defendant too frequently or too generously, they are likely to lose future work. There is also some evidence that arbitrators favor "repeat" clients. In addition, arbitration takes place largely in secret and there are sharp limits on the consumer's ability to engage in discovery (gather evidence and information). To make matters worse, the arbitration fees are generally quite significant. (killing the idea that this whole process is cheaper for everyone!). Consumers may have to pay all or part of the filing fees and the hourly or daily rate for the arbitrators themselves is quite high. These clauses, combined with the venue restrictions mentioned in the article are nothing but ways to shut off relief for victimized students.

This does not mean that consumer/student advocates are insensitive to the fact that some students may need more money to pay for college than what they can obtain through government or other sources. The idea is to rein in the predatory practices in the market so that these students have access to affordable, easy-to-understand products.