The investigation will examine Bilston Community College's partnership with Ellel Ministries, an exponent of "deliverance" ministry. Leading churchmen are concerned about the group's expansion into education.
The Right Rev Dominic Walker, the Bishop of Reading, and Church of England's chief adviser on exorcism, said Ellel was "a fundamentalist group at the extreme end of the Christian spectrum".
He said members believed that demons entered people's bodies.
"This organisation is not mainstream by any means," he said. "I would say that people should be cautious when getting involved with anything so fundamentalist."
The Lancashire-based group runs its own residential counselling courses, but entered into the partnership as part of the Wolverhampton college's community education programme. This was terminated last year; Bilston staff were concerned with quality assurance.
The programme - Healing in the Kingdom of God - had two to five-day introductory-level residential courses. Bilston planned to fund 16 of the units, ranging from Anger . . . how do we handle it, Foundation for Wholeness and Ministering to the Rejected to Worship and Self Worth.
Units dealing with the group's controversial "deliverance" ministry, teaching students how to "be aware of the principal demonic footholds in a person's life" were rejected by the college.
Staff insisted the 16 units were simply introductory Christian theology and counselling courses.
The FEFC confirmed it was investigating, after Paul Mackney, now leader of lecturers' union NATFHE, complained to Education Secretary David Blunkett.
Bilston deputy principal Frank Reeves said: "To argue against funding our many basic skills courses on the grounds that one group has controversial theological dogmas is really a red herring."
The investigation also covers other Bilston courses and will determine whether it spent public funds in accordance with legislation.