Student loans and forced arbitration

Student loan borrower who alleged interest-rate scheme will not get his day in court: Only arbitration provider picked by the company can decide the fairness of the arbitration"Christine Hines"

Student loan borrower *Justin Kuehn, who sued his lenders in April alleging that they engaged in an interest-rate scheme to deceive him and other borrowers, will have to resolve those claims in private arbitration instead of in court. In yesterday’s decision (PDF), a New York district court said that Kuehn, who had also challenged the  enforceability of the terms of an arbitration clause in the loan promissory note, said that an arbitrator – not the court – will have to decide on whether the arbitration terms in the contract are “unconscionable” or whether the arbitration must go on.

In 2007, Kuehn had entered into a contract online with Citibank, the Student Loan Corp., and Discover Bank, to consolidate his private loans. Later on, he discovered that his auto-payments had been reduced. Kuehn alleged that the banks deceived him and other borrowers into believing that the payment reduction was a result of an interest rate reduction when in fact it was attributable to a reduction in the amount of principal being repaid each month. Resulting in prolonged loan payment terms and additional interest paid by borrowers.

 “I am disappointed at the result,” said Kuehn. “The fact that an arbitrator gets to decide whether the arbitration clause is enforceable gives him or her the power to decide on an issue that benefits the arbitrator financially. With companies’ widespread use of forced arbitration in contracts, our only option as consumers is to challenge the validity of the arbitration clause itself in court. But that option is also gone.”