The warning comes in a joint report written by country treasurer Ray Hale and education director Jackie Strong, following the discovery that Oadby Beauchamp College need not have gone into the red by Pounds 162,000 in the 1993-94 financial year, as it had enough cash to cover the overdraft in its private funds.
By going overdrawn it was effectively borrowing the cash from the education authority, and Oadby has now agreed to pay the authority Pounds 4,000 - the amount of interest that the council lost because of the college's overdraft.
Instead of covering the deficit, it decided to leave the cash in its private funds to gain interest. And that, say education chiefs, was not playing by the rules.
The joint report states: "There was a written commitment by the college to balance its books by March 31, 1994, and although it was in a position to comply with this it did not do so.
"As a result, the money remained in the college's private account and interest was gained on the amountIIt would be appropriate in cases of unauthorised overdrafts such as this automatically to charge the school or college interest on the overdrawn balance.
Oadby Beauchamp's administrator, Geoff Thomas, said it was "basically a different interpretation of requirements rather than a misunderstanding". As a community college with facilities including a bar and tuck shop, reserves had been built up over a period of five years.