The Department of Education on Friday issued a rule banning colleges that participate in federal loan programs from being able to use forced arbitration agreements in student enrollment contracts.

The clauses, often slipped into the fine print, force students to give up their rights to settle disputes with a school in court. They dictate that students must instead go through a private arbitrator often chosen by the school.

ADVERTISEMENT

Starting July 1, schools that participate in the federal Direct Loan program must remove these clauses from their contracts.

Regulatory advocates called the rule a game-changer.

“For far too long, predatory schools have used fraud as a business model, and they’ve gotten away with it by shutting the courthouse doors to students and forcing those students into individual, secret arbitrations,” Lisa Gilbert, director of Public Citizen’s Congress Watch division, said in a statement.

“The burden of making students whole for fraud should fall on the shoulders of schools that break the law, not vulnerable students or the public.”

The rule, which aims to protect students from predatory practices, also offers relief for students who have been defrauded or deceived by a school, like those who attended Corinthian College and ITT Technical Institute.

It creates a process in which federal loans will be automatically discharged, so long as the student did not enroll in another institution that participates in federal financial aid programs within three years. But the school must have closed on or after Nov. 1, 2013.

The rules also require financially risky schools to provide clear, plain-language warnings to prospective students, current students and the public.

"To protect students from the start, the regulations seek to deter institutions from engaging in predatory behavior or otherwise exposing the government to risk," Under Secretary of Education Ted Mitchell said in a statement.

"And the rule will protect taxpayers by requiring institutions to put up collateral when they're at risk of closure.”