Our Lady of Grace was founded by the Benedictine sisters of Ferdinand Indiana at the prompting of Paul C. Schulte, Archbishop of Indianapolis. It was the Archbishop's desire to have a home for the elderly in his diocese. He approached the Ferdinand sisters with the prospect of staffing such a facility.

Because the Ferdinand community was relatively large, the sisters decided to found a daughter house and an academy for high school students in addition to the archbishop's request.

In 1956 Our Lady of Grace Academy opened with 27 ninth graders. In 1960 St. Paul Hermitage opened with rooms for 92 residents. The sisters of the new foundation declared their autonomy, as all Benedictine monasteries do, in 1961.