LOUISVILLE, Ky. (WDRB) – St. Catharine College is at the “brink of extinction” due to a dispute with the U.S. Department of Education over student-aid funds that haven’t been reimbursed, the college claims in a federal lawsuit.

The small Roman Catholic school near Springfield, Ky., alleges in court documents that the Education Department has failed to pay back “hundreds of thousands of dollars” in financial aid. The college has lost students and will close unless a judge orders federal officials to release the money, according to the lawsuit filed Monday in U.S. District Court in Louisville.

"There's no legal reason at all that they should hold these funds from our students. They have no right to do that," said Dr. Cindy Gnadinger, the college’s president. "If our students can't get aid to come here, then we won't have students."

The dispute largely centers on whether the college needed to obtain federal approval to disburse financial aid to students enrolled in undergraduate degree programs that were added from 2011 to 2014. St. Catharine didn’t seek the approval, according to the lawsuit, because it did not believe those programs amounted to a substantial change in the college’s offerings.  

Among other things, the college is seeking a court order requiring the Education Department to pay the reimbursements, in addition to other unspecified damages. Closing the college would have “tremendous and devastating” consequences, the suit claims.

"We feel very strongly about our case. We think a judge will side with us," Gnadinger said.

If that doesn't happen, she said "I will go back with the Board of Trustees and we will go back to the drawing board and look at our options at that time and make a decision."

The Department of Education did not respond to messages seeking comment. U.S. Education Secretary John B. King Jr. and Kathy Feith, a Missouri-based department employee, are named as defendants in the lawsuit.

St. Catharine claims Feith told college officials to stop awarding financial aid to students enrolled in the new undergraduate programs because the school hadn’t gotten approval from the Education Department. For its part, the college disputes that it needed federal permission.

In all, the college claims it hasn’t been reimbursed more than $645,000 in financial aid payments since April 2015. And it argues the Education Department rejected aid for some students even though the college followed the department’s guidelines.

The college used funds from a scholarship and loan program to offset the shortfall in student aid money, according to the lawsuit. It claims the Education Department’s actions forced St. Catharine to “expend hundreds of thousands of dollars in private funds in barely a year, student aid funds that otherwise would have and could have been given to assist other students.”

The lawsuit also sheds light on the circumstances behind the departure last year of William D. Huston, who had served 18 years as the college’s president. In a news release, Huston said he chose not to renew his contract and “transition into retirement.”

But St. Catharine’s trustees “replaced” Huston in response to sanctions levied by the Education Department in early 2015, the lawsuit claims. At that time, federal officials placed the college on “heightened cash monitoring,” which requires the school to distribute aid to students, then apply for reimbursement.

Inside Higher Education  reported last spring that St. Catharine was one of 20 colleges whose access to federal funds had been curtailed after an audit's “severe" findings.

Besides Huston, the lawsuit claims, the college replaced its “entire senior leadership team” and 90 percent of the staff in the business and financial aid offices. St. Catharine also added a compliance director.

Roughly half of the college’s 600 students come from low-income families and receive some form of financial aid; the school has about 125 full-time employees, according to the lawsuit.

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