The U.S. Office of Education is investigating allegations that the Lacaze-Gardner business school in Washington has obtained millions of dollars in federal student aid money to educate low-income inner-city students who never complete their courses of study.

The school, which attracts prospective students with heavy television advertising that promises better paying jobs with a Lacaze-Gardner education, came under federal scrutiny in May when it noted that as many as 80 percent of its students drop out without obtaining a degree.

Some 70 percent of all the school's students receive federal assistance to pay the $2,900 tuition for the nine-month program. Last year the school grossed more than $7 million, the bulk of which was provided by federal student aid programs.

In one case, according to federal officials, 60 percent of a $1 million federal student aid fund reserved for Washington residents was consumed earlier this year by Lacaze-Gardner students. As a result, the funds were exhausted before many students at other institutions and schools could apply for and receive loans from the program.

Office of Education officials also said they will investigate student complaints that Lacaze-Gardner, at 710 14th St. NW, pays a $50 per student referral fee to Job Bank, a job referral service at 1404 New York Ave. NW, for recruiting students eligible to receive federal loans for grants.

"We are conducting a preliminary review of Lacaze-Gardner to see if there are possible problems with the way the financial assistance programs are being conducted," said a spokesman for the HEW Inspector General, who has been asked by the Office of Education to examine irregularities at the school.

If warranted, the spokesman said a full-scale audit or investigation of the school would follow the initial review.

Richard A. Hastings, acting director of the office's certification and program review divisions, said two agencies which accredit the business and technical divisions of Lacaze-Gardner have also been asked to review the school's accreditation standings.

Lacaze-Gardner's owner, 34-year-old Daniel Grossman, has denied to U.S. education office officials that his school has done anything improper. He blamed "incorrect" record keeping at the school for the problems that officials have cited as reasons for their investigation.

Grossman pledged to remedy "the situation" and said future school reports on federal student aid would be correct.

Mary Otis, owner and director of Job Bank, denied that her firm has any agreement to refer potential students to Lacaze-Gardner.

"What we try to do is help young people get jobs so they can go back to school," Otis said. "If we refer people to Lacaze-Gardner it is because it is among a large number of accredited schools in the area that we work with."

A team of Office of Education officials who conducted a review of the school May 23 and 26 found eight of 10 students enrolled at the school failed to complete the nine-month program, which costs $2,900 for most courses of study when completed. Last year 3,000 students attended the school.

According to a 1975 profile of the Lacaze-Gardner student body compiled by the school, the median age of students enrolled is 23. The majority of the students "lack simple, verbal literacy skills" and function on an elementary school level.

The Lacaze-Gardner school teaches business skills and lists in its brochures such course as keypunch clerical, general office receptionist, executive secretarial, drafting, stenotyp and shorthand, business accounting and management.

"An area of great concern to the Office of Education and the reviewers is the rate of retention and the resultant large number of BEOG (Basic Educational Opportunity Grant) recipients in relation to the enrollment," wrote Hastings in a July 6 letter to Grossman.

The review of Lacaze-Gardner in May showed that, in October 1977, the school had an enrollment of 1,296 full-time and 162 part-time students, most of whom receive some form of federal assistance.

Last February, while total enrollment did not change, the number of federal loans and grants being paid to the school jumped to 2,189 students. Lacaze-Gardner later asked permission to increase the number of subsidized students it could admit to 3,290, still without increasing its enrollment figures, Hastings stated in the letter.

"Normally, this kind of increase during one academic year is not possible," Hastings wrote. "The peculiar circumstance in which this occurred is the fact that there is a very high rate of student turnover."

Under Lacaze-Gardner's tuition refund policy, the student must pay the total tuition cost if he completes 75 percent of the course.If the student drops out before completing 75 percent of the course, the tuition charged is prorated. An additional charge of 10 percent of the unused tuition is added to the prorated fee.

"We try to provide an educational opportunity for many students who may not be able to get into other institutions," said Grossman whose school's current enrollment of 900 students is made up mostly of low-income inner-city Washington residents.

"Certainly some of our students are lacking in basic math and reading skills when they enroll with us," added Grossman, who lives at the Watergate Hotel and drives a Rolls-Royce. "But we make every effort to help them correct their deficiencies and learn a job skill."

Grossman, who would not quote a "droupout" rate for his school, maintains that the definition for "droupout" may differ for different schools. He said that many students who enroll for standard nine-month course may discontinue school when they obtain the kind of employment they are seeking.

"While some people might look at those students (who quit their classes) a s'dropouts,' we maintain that the students got what they came to us for - and that is a job," Grossman said.

Carlene Cheatam, who said she was recently fired as director of education at Lacaze-Gardner after working there for, two years, said business skills courses - such as key punching and others - are often of high quality. But she said students frequently are not equipped to do the work.

"Many of the students who enroll have given little thought to transportation problems, child care or to the fact that they will have to devote long hours to studying," said Cheatam.

For variety of reasons, he said, students fall behind and may quit early in their classes.

Kathy Scipio, 26, of Northwest Washington said she enrolled at Lacaze-Gardner in February. "I wanted to take a course in sewing," she said. "But a fast-talking sales representative who talked with me the first day told me I should go into a secretarial program that I wasn't interested in."

Scipio, who is scheduled to graduate late this month, said her initial interview was held in the school's modern reception area. She said her request to tour the classrooms on the upper floors was denied.

"The sales rep told me that I could not tour the school because it would disrupt classes," she said. When she did begin classes, Scipio said she found the classrooms to be dirty. The paint was peeling and she noted what she said were broken machines used in instruction and the presence of rats.

Grossman said that on occasion he has seen roaches in the school buildings he owns at 710 14th St. NW and at 1404 New York Ave. NW, which is around the corner. But he said he was "not familiar" with the problem of rats on his property.