(St. Catharine College)

St. Catharine College in Kentucky is closing its doors after a protracted fight with the U.S. Department of Education left the small Roman Catholic school in a financial hole.

Three months ago, St. Catharine filed a lawsuit against the department for withholding more than $1 million in federal loans and grants as a condition of heightened cash monitoring, a form of federal oversight the school was subjected to for more than a year. Although government officials said their decision was made in error and promised to reimburse some of the money, the damage proved too much for the school to overcome.

John Turner, chairman of St. Catharine’s board of trustees, blames the federal sanctions for the trouble the school has had attracting students. Whereas the small private college touted 600 full-time students prior the the problems with the government, there are now fewer than 475 enrolled for the fall, according to the school. Turner said the decline in enrollment has been difficult to handle with the school’s obligation to repay debt used to finance the construction of a new residence hall, health-science building and library.

“The challenges facing St. Catharine College are insurmountable,” Turner said, in a note to the campus community Wednesday. “Without the enrollment and with [Education’s] chokehold on our cash flow, the debt is simply not manageable.”

In a scramble to keep the doors open, college administrators and trustees have explored creating an alliance or merging with other institutions in recent weeks. St. Catharine president Cindy Gnadinger held meetings with several college leaders, but the discussions were unsuccessful. As a result, the board voted Tuesday night to close at the end of July.

Administrators have reached out to neighboring schools to establish teach-out plans for current students, and are devising articulation agreements to make sure students have an easy time transferring their credits. Once summer courses are completed, the school, founded in 1931, will shut its doors and 118 employees will be out of a job.

What’s striking about St. Catharine’s dispute with the Education Department is that small private colleges rarely face the level of financial scrutiny this school endured. Trade schools and other for-profit institutions make up nearly two-thirds of the colleges under the most restrictive form of monitoring.

Schools are monitored for a myriad of reasons, including turning in late financial statements, operating with a lot of debt or having accreditation problems. The oversight is not necessarily a sign that a school is in any immediate danger of losing federal funds or folding, but for St. Catharine it was the beginning of the end.

The dispute was rooted in whether St. Catharine needed federal approval to disburse financial aid to students enrolled in five undergraduate programs added from 2011 to 2014. School officials said 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.

St. Catharine officials said 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.

A copy of the sanction letter provided by the department said the agency took action because of “severe findings” in the program review, but it offered no further details on those findings. A Missouri-based department employee, Kathy Feith, who was 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.

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. Between the rejected reimbursement requests and the financial aid for students in the new programs, St. Catharine spent more than $1.1 million, almost 10 percent of its annual operating budget.

Education Department officials agreed that the programs did not need federal approval and were eligible for aid shortly after St. Catharine filed the lawsuit. The department promised to reimburse the school for a portion of the loans and grants, but college officials demanded repayment for all of the money the school put up. A judge order the two sides to hash out their problems in mediation, but the department refused to pay the college damages to resolve the case.

St. Catharine needed $5 million to shore up its finances for the coming school year. While a few donors stepped in to help, school officials say the fundraising efforts were not enough.

Read more about federal financial aid:

Department of Education pulls federal aid to trade schools

Beauty school chain shuts down days after tangling with the government