Two federal agencies are investigating the use of federal grants by inmates in a dozen Virginia prisons to pay for the courses of a small, profit-making school that pays $10 to its student-inmates for every fellow-prisoner they sign up.

The small-business management course offered by the Elizabeth Brant School of Business in Staunton has attracted hundreds of inmates. Brant collects about $1,600 from the federal Basic Education Opportunity Grants (BEOG) program for each prisoner and then does not collect the other half of its $3,200 tuition, which means the course is free to inmates.

The BEOG program is designed to pay up to one-half of the tuition for eligible students, and auditors from the inspector-general's office of the U.S. Department of Education are in Staunton this week inspecting Brant's "scholarship" program for prisoners.

Until Brant began its prison program three years ago, inmates with high school diplomas or the equivalent took classes offered by the state's community colleges, but were required to finance half the cost, or about $150, from their own pockets. Since Brant began offering the course to inmates for free, it has virtually monopolized postsecondary school teaching in the state's prisons.

Stuart A. Sandow, the owner and president of Brant, said yesterday that federal officials have "winked at" the tuition-forgiving formula since its inception. He blamed the Education Department investigation, and a second one by the General Accounting Office, on jealous community college officials.

Sandow, who operated a newspaper in Columbia, Md., before buying the tiny secretarial school in 1978, said the nine-month Brant program is aimed at qualifying inmates, upon their release, to be managers of fast-food franchises. He said he had no evidence of whether graduates of the program got such jobs, because Brant has no placement service and does not follow up its graduates once they are released.

The federal grants have provided a bonanza for Brant, which earlier this year had 643 inmate-students, comprising more than 80 percent of its total enrollment. Sandow said enrollment yesterday was down to 253 because it is near the end of a quarter, and the dropout rate is high. Federal investigators say Brant has received more than $545,000 from BEOG and a second federal program, Supplementary Education Opportunity Grants (SEOG), which works the same way as the BEOG program.

Dr. Charles Price, superintendent of the Rehabilitative School Authority, the state agency charged with overseeing prison education, defended the Brant program as "a good one." He said he suggested Brant "branch out" to prisons throughout the state after reviewing a pilot program in 1978 at the Staunton Correctional Facility. He said prison officials have received few complaints from prisoners, and that the agency "maintains a marked degree of neutrality" about what schools prisoners choose.

However, Rep. William Whitehurst (R-Va.), who initiated the investigations, said yesterday that "the state apparently has abrogated its responsibility" for educating prisoners.

The Norfolk member of Congress said Brant's tuition "must be too high" if it can waive half of it and still make a profit from its prison education program. Whitehurst said he will introduce legislation next week to make prisoners ineligible for BEOG grants and require them to apply to a fund especially earmarked for prison education.

Whitehurst, who has been looking into prisoner benefits since sponsoring legislation last year that cut off Social Security payments to David C. Berkowitz, the "Son of Sam" mass murderer, said GAO investigators were checking reports that Brant classes are poorly attended by both prisoners and instructors.

But Supt. Price said his agency gets monthly reports on enrollment and attendance, and that students are excused "only if they are sick or locked up."

Price added that the federal auditors had not contacted his office, but added, "I understand it is a routine audit." Price said he views the $10 fees paid to prisoners for signing up fellow inmates as "an incentive" that is "of no particular concern" to his agency. He said the money goes into the prisoner's personal accounts and "can't be in cash, which can become trouble in the yard."

Asked whether he thought the Brant program was worth the tuition charged, Price said, "It's a buyer's market."

Price, a former public-school teacher who has directed the agency since its inception in 1974, said the "competition is healthy" between Brant and the public colleges.

Price agreed with Sandow that job placement is "a function of the parole service" rather than the RSA or its participating schools. He also questioned the value of follow-ups. "It would be spurious to equate recidivism with education," he said.

Dr. S. A. Burnett, president of J. Sargeant Reynolds Community College in Richmond, whose enrollment has suffered since Brant entered the prison education field, was among those who initially questioned Brant's use of the BEOG grants.

Burnett said his school's program is fully accredited while Brant's program offers only a certificate that the student has finished the course. "Is a Chevrolet competitive with a Cadillac?" Burnett asked.

Sandow said, however, that prison officials had invited Brant to offer its courses because of "the low graduation rate and inmate dissatisfaction with" junior college offerings.