Iolaus used to be a thief, until he was caught. He was offered a choice: Jail or Cheiron's Academy. Iolaus often struggles to make enough money for tuition and get passing grades to avoid having to go to jail.
Although not explicitly stated, it's assumed that the prank Iolaus pulled with the pig's bladder in (Movie Pilot) is the act that got him in this situation. Although not shown in the movie, in the Movie Novelization Iolaus is caught shortly after the twister explodes in the marketplace.
I borrowed that money - from Nysus.
Nysus/Strife: From me? Iolaus, everybody knows I don't have that kind of money.
Nysus! Come on! This is no time to joke around. I'm already here on probation. They'll bury
Well, the way I see it - I'm the reason they gave you the choice between goin' to jail and joining the academy.
Iolaus: Ah, they couldn't prove anything.
That's because I didn’t talk. So I figure you owe me.
So I was, uh, thinking I might, uh, sneak out.
Jason: Are you crazy?
Hercules: You get caught, and you'll get kicked out of school.
Iolaus: Well, if Kora fires me, I can't pay my tuition anyway. The thing is - I need you guys to cover for me.
Jason: You gotta be kidding, Iolaus.
Hercules: Ah, I don't think so, you know?
Don't you remember why I'm here? Probation. If I'm not in the academy, I'm in jail. I’m going to Kora's, whether or not you help me.
Hercules: (reading from a scroll) "Order of the Magistrate, regarding probationary cadet Iolaus. Pursuant to original agreement, cadet will maintain a passing grade each term or be returned to for fulfillment of original sentencing." (to himself) If Iolaus doesn't pass, he's going to jail!
Iolaus, if Cheiron catches you cheating it's a one way ticket out of the academy! No second chances.
Iolaus: I've already got a one way ticket out of the academy if I don't pass my finals.
Hercules: I know. I read it.
Iolaus: (lightly) You should thank me. When I get kicked out of here, I bet Fiducius'll declare a school holiday to celebrate.
Don't even joke about this. Jail is serious.
Months ago Iolaus had been given a choice by the magistrate. The first choice was to do jail time for being a thief. The second was to go to the Academy.
Since taking the second choice, he had been attacked by a phoenix, the god of war, an Amazon tribe, several giants, a venom-spitting basilisk, a bunch of Bacchae, a wannabe assassin, and Hercules' half brother Lucius. He'd been framed for robbery by the god Strife, held hostage by his old gang, and sucked into the dreamworld.
Now he was covered in mud, standing in a wrecked castle on an unnamed island in the middle of nowhere, about to be eaten by the dog of war.
Jail was looking better and better all the time.