St. Catharine College in Kentucky is suing the U.S. Department of Education for withholding more than a million dollars in federal loans and grants, a move that the small Roman Catholic school’s leaders say has put it in jeopardy of closing.
The college has been subjected to a form of federal oversight known as heightened cash monitoring for more than a year. Schools face the added scrutiny for a host of reasons, including turning in late financial statements, operating with a lot of debt or having accreditation problems. Being monitored is not necessarily a sign that a school is in any immediate danger of losing federal funds or folding, but for St. Catharine, administrators say that’s exactly what it means.
“We’re very close to closing our doors,” said Cindy Gnadinger, president of St. Catharine, which has 600 students. “We’re in a dire financial situation. All of what we’ve built is in great jeopardy based on the egregious act of the Department of Education. I wanted to work with them. I did everything I could. It’s just become impossible.”
It is a little unusual for a small private college to face this level of financial scrutiny from the government. Trade schools and other for-profit institutions make up nearly two thirds of the colleges under the most restrictive form of monitoring.
Higher education experts suspect the department is becoming more aggressive because of the stunning collapse of Corinthian Colleges. The for-profit company, which ran Everest, Heald College and WyoTech schools, stood accused of steering students into high cost loans and running dubious programs, yet received $1.4 billion in federal financial aid a year. Advocacy groups and lawmakers have criticized the department for dragging its feet before cutting off Corinthian’s access to federal funds, which crippled the company and forced the sale of more than half of its 107 campuses.
At St. Catharine, the dispute is rooted in whether the college needed federal approval to disburse financial aid to students enrolled in five undergraduate programs added from 2011 to 2014. School officials say the creation of the programs did not warrant federal involvement under the department’s own rules. All the school needed was permission from the state and its regional accreditor, the Southern Association of Colleges and Schools (SACS), according to the complaint.
Administrators at St. Catharine say they first learned there was a problem in January 2015, when the federal department placed the school on heightened cash monitoring 2, the most restrictive category, following a routine audit. Schools in that category must provide the government detailed documentation for every federal financial aid recipient before being reimbursed for student loans and grants.
Gnadinger said the school made every effort to comply, even though the department never explained what the school did wrong, she says. A copy of the sanction letter provided by the agency, which declined to comment on the case, says the department took this action because of “severe findings” in the program review.
A Missouri-based department employee, Kathy Feith, who is named in the lawsuit, allegedly told school officials that the sanction was the result of the school’s failure to seek federal approval for the five programs. According to the complaint, she instructed St. Catharine to stop awarding federal financial aid to students enrolled in the programs beginning in the spring 2015 semester.
“They questioned the curriculum in some of the programs. They questioned the approval that SACS provided. They had the audacity to call SACS to question the decision to approve the programs,” Gnadinger said. “There was nothing in regulation they could point to, to show me why those programs shouldn’t be approved.”
To prevent students from dropping out of the programs, St. Catharine used its own money to fund grants and loans, hoping the government would refund the money once its review was completed. The school also was required to make financial aid disbursements to all other students from its own institutional funds and submit requests for reimbursement.
Gnadinger said the school had several successful submissions for reimbursement and felt it could handle the procress.
“As long as we know the rules, we can abide by the rules, we can easily manage this process,” she said. “The problem is they changed the rules frequently.”
She said the department came up with arbitrary reasons for denying aid reimbursement, including problems with the way students were coded in the school’s system. School administrators revised their process to meet demands, only to be given a new set of demands, Gnadinger said.
Belle Wheelan, president of the Southern Association of Colleges and Schools, said that it is especially frustrating for a smaller institution that really depends upon that money for their day-to-day operations to go through such an ordeal. “The time that it has taken away from doing the business of the institution to respond to these inquiries is ridiculous,” she said.
Between the rejected reimbursement requests and the financial aid for students in the new programs, St.Catharine wound up spending more than $1.1 million, just under 10 percent of its annual operating budget.
Days after the school filed its lawsuit against the department, the agency sent Gnadinger a letter agreeing that the programs did not need federal approval and were eligible for aid as of June 2014, but any time before then was still under review. Department officials promised to reimburse the school for a portion of the loans and grants, according to the letter reviewed by The Washington Post. Gnadinger is demanding repayment for all of the money the school financed.
“I’ve done everything that they have ever asked me to do, and it’s never been enough,” she said. “I have never encountered anything like this in my 20-plus years of being in higher education. It’s been a very frustrating year.”
The college is seeking a court order requiring the Department of Education pay the reimbursements and unspecified damages. An injunction hearing is scheduled for March 16.
It’s difficult to determine whether more colleges are being placed under cash monitoring than in years past. The department only began releasing the data to the public last year following months of wrangling with Inside Higher Ed, which filed an open-records request for the names of schools on the list.
St. Catharine is one of 86 colleges under the strictest form of cash monitoring, according to the department. Though 64 percent of those schools are for-profit institutions, the remainder are mostly small colleges.
“Small religious schools tend to run on really tight budgets. They may not be in the best financial shape,” said Anne Gross, vice president of regulatory affairs for the National Association of College and University Business Officers. “They may go on for years eking it out year to year. And that doesn’t work very well with the financial responsibility standards.”
A number of small private schools also have run into financial trouble as a result of low enrollment, according to Moody’s Investor Services. The credit ratings agency says the problem is especially acute for small schools offering deep tuition discounts to attract students. Because they are so reliant on net tuition revenue — the money earned from students after schools provide financial aid — the strategy is hurting their bottom line. Some small schools are cutting courses or consolidating departments to stay afloat.
Gnadinger says St. Catharine has seen an uptick in enrollment in recent years. But she is worried that the fight with the department could hurt enrollment if potential students are scared off by the financial problems.
“I’m not sure we’ll be able to recover from this,” she said. “It hurts us for the future, but it also hurts the current students who may not have an institution to come back to this year.”
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