The California Association of Private Postsecondary Schools (CAPPS) has filed a complaint in D.C. federal district court against the Dept. of Education and Education Secretary Betsy DeVos to overturn the “borrower defense” final rule issued by the ED last November.  CAPPS describes itself in the complaint as “a non-profit association of California private postsecondary schools” that has a membership of about 150 institutions, most of which are smaller institutions averaging less than 400 students and one or two locations.

The final rule, which is effective on July 1, 2017, broadly addresses the ability of a student to assert a school’s misconduct as a defense to repayment of a federal student loan.  It includes a ban on all pre-dispute arbitration agreements for borrower defense claims by schools receiving Title IV assistance under the Higher Education Act (HEA) and a new federal standard for evaluating borrower defenses to repayment of Direct Loans (i.e. federal student loans made by the ED).

The final rule prohibits both mandatory and voluntary pre-dispute arbitration agreements, whether or not they contain opt-out clauses, and prohibits a school from relying on any pre-dispute arbitration or other agreement to block a borrower from asserting a borrower defense claim in a class action lawsuit until the court has denied class certification and the time for any interlocutory review has elapsed or the review has been resolved.  The prohibition applies retroactively to pre-dispute arbitration or other agreements addressing class actions entered into before July 1, 2017.

While CAPPS challenges the overall final rule in its complaint, CAPPS also filed a motion for a preliminary injunction in which it asks the court to preliminarily enjoin only the final rule’s arbitration ban and class action waiver provisions pending the resolution of the lawsuit.  In the complaint and preliminary injunction motion, CAPPS alleges that the arbitration ban and class action waiver provisions conflict with the Federal Arbitration Act, violate the Administrative Procedure Act (APA), exceed the ED’s authority under the HEA, and violate the Due Process Clause of the U.S. Constitution to the extent they apply retroactively.  In the complaint, in addition to other statutory and constitutional claims, CAPPS alleges that other provisions of the final rule also violate the APA and exceed the ED’s authority under the HEA.