A few weeks ago, the Student Loan Ranger summarized the Department of Education's recently proposed draft rules that would make it easier for defrauded student loan borrowers to have a portion or all of their federal student loans discharged.

Within that same draft rule, the Department of Education also proposed some additional changes that are intended to help protect students and the federal taxpayer by increasing transparency, installing some financial protections and ensuring that consumers have multiple avenues for potential relief if something should go wrong.

These changes will also make it easier for those who pay for education expenses out of pocket or with private student loans to obtain relief if their school misrepresents itself or educational outcomes.

Read about three changes that will help student loan borrowers. ]

Arbitration is a process where claimants have agreed to have a third party rule on their dispute. The draft rule would in some cases prohibit schools that are participating in the federal direct loan program from using mandatory predispute arbitration.

Although, as we discuss below, predispute arbitration can be harmful to consumers, not all arbitration or mediation is bad. Once finalized, the draft rules will only bring possible relief to those students who financed their higher education with federal student loans.

However, defrauded students have often paid for a portion of their expenses out of pocket or through private or state loans. Because the discharge rules don’t allow for recovery for those amounts, arbitration or legal proceedings may be students' only way to possibly receive reimbursement in cases of school fraud or misrepresentation.

The Trouble With Predispute Arbitration Clauses

In recent years, some industries, including educational institutions, have begun inserting mandatory predispute arbitration clauses in their contracts with consumers. Since 2011 when the Supreme Court affirmed the use of such clauses, hundreds of higher education institutions have added them, or similar restrictions, to the enrollment contracts students are required to sign to attend.

The Consumer Financial Protection Bureau recently found that such clauses are especially prevalent in the consumer finance area – with almost half of all credit card accounts subject to mandatory predispute arbitration clauses.

Learn how a new student loan repayment process may help end confusion. ]

Courts often encourage arbitration as a way to save costs for both the claimants and the court system in cases of routine disputes, especially those that arise between businesses. Opponents of such clauses claim that mandatory arbitration often favors the business that required the clause in the first place.

Some arbitration clauses, for example, require the hearing to be held in a location that may be convenient for the business but inconvenient to the consumer. In addition to these travel costs, some consumers may incur hundreds of dollars in filing fees just to initiate the process.

In the higher education world, the school often pays for or at least chooses the third-party arbitrators, making it difficult to prevent bias if the arbitrator has the possibility to obtain a repeat customer.

The other problem with these clauses is that they can cost the consumer many of their rights to bring any future disputes to court, effectively preventing many class-action suits.

Due to their very nature, though, class-action suits can put the consumer on more equal ground with the business because they consolidate resources and the potential evidence related to multiple claims with the same complaint. Class-action suits can also be an effective way for consumers to pursue relief when the same conduct or behavior has harmed them.

If finalized, the draft rule would prevent a school from forcing students to use arbitration or an internal process in cases where students feel they have a case that the school violated state laws in relation to the students' federal direct loans or the educational services the school provided.

However, because of the Department of Education's limited authority, the rule would not prevent a school from requiring arbitration and prohibiting participation in a class action lawsuit for other types of claims.

Explore three ways a student loan could be discharged. ]

The Case for Arbitration

As we mentioned above, the Student Loan Ranger wants to be clear that not all arbitration or mediation is bad. In fact, in many cases, arbitration between two parties who are on equal footing can be a much more reasonable and even fairer option than going through the often lengthy and expensive court process.

Many businesses choose to use a mutually agreed-upon arbitrator to resolve a dispute after it arises to avoid the costs of litigation. And many states encourage such action to relieve the burden of these cases on the court system.

This is why we support that the draft rule does not prevent arbitration across the board but rather ensures that arbitration can only be used if both parties are agreeable to it.

Even then, the draft rule would require schools to communicate such cases of voluntary arbitration to the Department of Education to ensure the department is aware of any potential borrower defense claims, even if the borrowers never file for discharge.

Proponents of mandatory arbitration clauses argue that prohibiting the clauses will put many schools out of business due to increased legal expenses. Draft rule supporters, though, point out that a majority of nonprofit colleges and universities don't have such clauses and they seem to be doing just fine.