Are Students the Weaker Party in Loan Contracts?

Not all bargains are struck between parties with equal bargaining power; sometimes one party is far stronger because of greater knowledge and experience or because of the particular situation of the weaker party. If a vessel is sinking, the only other ship in the vicinity can drive a hard bargain before saving the crew. In contract law, various situations have arisen in which the parties that agreed to a contract had unequal bargaining power and the weaker party later sought to overturn the contract.

Might we consider students to be the weaker party when they contract for student loans? The quick answer is “probably not” though — caveat emptor — I’m no lawyer and no expert on contract law.

There is no law that prevents anyone from borrowing money to do something economically silly,  whether it be investing in diamond mines that never produce diamonds or paying thousands for a postsecondary degree that never produces a job.  In some circumstances, however, the poor decision might have been the result of a stronger party bargaining inequitably with a weaker party.

If I force you to sign a contract — as your vessel is sinking beneath you — you might later be able to claim that you agreed only under duress, having no available alternative. “Duress of the person” means exactly that — the threat of actual or threatened physical violence forced you to sign the contract.  “Duress of goods” occurs when the threat is not physical violence but instead the threat to seriously damage your business. One key issue here is whether the weaker party had any viable alternatives to signing the contract; if not, the economic threat posed by the stronger party was so ominous that it compelled the weaker party to sign the contract. Neither type of duress applies to student borrowers — no one threatens physical violence if the loan contract is not signed and, while the loan might be mandatory if the student is to attend the college of choice, educational alternatives abound.

Alternatively, the stronger party might exert undue influence that results from “an ability to exercise exceptional power in relation to another person’s choices” (Ben-Ishai, Percy, Boyle, McCamus and Flanigan, p. 678).[1]  The starting point here is the observation that the agreement made by the weaker party was so much to his or her disadvantage that there must be a presumption of some sort of malign influence. The weaker party must also be shown to have been victimized by someone she trusted and in whose judgement she had confidence. For example, if a psychiatric patient makes a large gift to his psychiatrist, a gift so large as to imply a manifest disadvantage, the patient (or his relatives) would have an argument that the gift was the result of undue influence.  For students, however, there is no doctor-patient, lawyer-client, or parent-child relationship that might qualify as one in which there could be a presumption of undue influence.

Finally, the contract might have resulted from unconscionable actions taken by the stronger party. In order to overturn a contract because of its unconscionability, there need not be any duress and there need not be any undue influence arising from a close personal relationship.  In the narrow view of unconscionability, the two key  elements are first that the weaker party, by virtue of need, ignorance or inexperience, is vulnerable to exploitation and second that the bargain struck is to the great disadvantage of the weaker party.  A wider view asserts that these ideas amount to the opinion that a contract can be overturned if the circumstances under which it was signed violate community standards, that ordinary citizens would immediately judge the terms of the contract unfair.

The availability of independent advice is an important factor in all these cases. If the weaker party has received such advice, and signed the contract anyway, it is hard to argue that unfair advantage has been taken.  If the stronger party, knowing that it is negotiating with a weaker party, fails to suggest that the weaker party seek independent advice, that fact bears on the unconscionability of their actions.

In the context of student loan contracts, let’s consider two aspects involved in the protection of weaker parties. First, is there an inequality of bargaining power?   I would argue that many students, and especially “first generation” students whose parents have not gone to college, are at a great disadvantage relative to the lenders and to the school.  They are inexperienced, often uninformed and feel that they urgently need a post-secondary education. Moreover, they have no-one to turn to for independent advice.

In taking out a student loan, the majority of students are making their first major financial decision so their inexperience in such matters is obvious. We know from focus groups studies that students have very little idea of the contents of their loan contracts, often not understanding that the money they will receive is a loan and not a grant, and having only a sketchy idea of how compound interest works.  They are constantly being bombarded with the message that their future economic success turns on having a college degree.[2]  If taking a loan is the only way to finance that degree, their need is evident.

Demonstrating the second piece of the narrow doctrine of unconscionability seems more problematic to me. Is the bargain — students taking out a loan to go to college —to the manifest disadvantage of the student? And are the banks and the schools taking advantage of their stronger position to further their own interests? In most cases, the answer is obviously no. On average, getting a college degree is an economically desirable achievement; indeed, encouraging that outcome is the motivation for the existence of government-subsidized student loans. The manifest disadvantage, if it exists at all, exists when students borrow to attend schools that have very low graduation rates and offer programs that hold little prospect of gainful employment for those who do manage to graduate.

The graduation rate at private, for-profit colleges — think University of Phoenix — is only 16 percent for dependent students and 88 percent of students at such colleges take out student loans (Avery and Turner, 2012, p.178). The value of such degrees for those who do manage to graduate is quite unclear.[3] If these facts are well-known to both the schools and the lenders, and if they fail to advise potential borrowers to seek independent advice before borrowing, is not the resulting contract unconscionable?

Of course,  a far more straightforward method of helping the students would be to strength the standards that schools must meet to be certified as degree-granting institutions and to be eligible to participate in government loan programs. Using campaign donations and intensive lobbying, however,  these schools have developed and maintained considerable power to avoid such measures.[4]  Perhaps a case or two arguing, even unsuccessfully, for the cancellation of a student loan contract on the grounds of unconscionability would stiffen the backs of legislators.

[1] Much of the discussion of the law as it relates to the protection of the weaker party in based on Chapter 11 in Ben-Ishai, S. & D. Percy, eds. Contracts: Cases and Commentaries (8th ed., Careswell, 2009). These authors, however, are not to be blamed for any errors that I may have made.

[2] Avery and Turner (2012, p.169) write “… researchers have documented that students often misunderstand financial aid packages, fail to understand the much greater costs of consumer loans (such as credit card debt) relative to student loans, and miscalculate the trade-off between academic study and market work.  See Avery, C & S. Turner. (2012). Student Loans: Do Students Borrow Too Much or Too Little. Jounral of Economic Perspectives 26(1), 165-192.

[3] See for a summary of a US Senate report entitled “For Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success” (available at that is highly critical of the for-profit sector.

[4] For a report on the magnitude of the lobbying effort by the for-profit sector, see

About Saul Schwartz

Professor School of Public Policy and Administration Carleton University Ottawa, ON K1S 5B6 Canada
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