Virginia's colleges and universities, which often battle each other for state funds, joined forces today and called on legislators not only to restore all the cuts in their budgets proposed by Gov. George Allen but also to increase funding by $40 million.

"The state is on the verge of falling into the precipice," risking its reputation as home to some of the nation's best public universities, warned Northern Virginia developer John T. "Til" Hazel Jr., chairman of the Virginia Business-Higher Education Council.

Hazel was the leadoff speaker at a public hearing at which more than 500 people signed up to tell members of the Democrat-controlled legislature's finance committees that Allen's proposed $2.1 billion in tax cuts imperil the state's competitiveness and its reputation for caring. The turnout was the largest ever for a budget hearing, veteran lobbyists said.

Other speakers warned that if the Republican governor's plan is adopted, the proposed tax savings -- as much as $33 this year and topping out at $265 annually in 1999 for a family of four -- would be more than offset by the dire effects on programs aimed at helping the poor and disabled, and on elementary and secondary education, transportation and the arts.

Hazel said previous budget cuts already have forced the 17 degree-granting state institutions of higher learning to increase tuition to the second highest in the nation, while financial support from the state has plummeted to near the bottom.

"If the governor's reductions are not restored," Hazel warned, "for the first time in history, state funding will support less than one-half of the total cost of Virginia's public higher education system. If this pattern is not reversed and the commitment is not renewed, Virginia can no longer claim to have a state-supported system of public higher education."

The 35-member bipartisan business group, composed of leaders from many of the state's major employers who have ties to various schools, called on lawmakers to appropriate about $100 million more for colleges than proposed by Allen: $47.4 million the governor wants to cut for the coming fiscal year, $14.7 million in cuts already in the current budget and an additional $40 million.

The next step in the drive to restore college funds is planned for Thursday, when Maj. Gen. John W. Knapp, superintendent of Virginia Military Institute, plans to take the case to the Senate Finance Committee.

"We're united on this," said Knapp, who said he will be representing all of his fellow college chiefs.

One of the few defenders of Allen's plan at today's hearing was James C. Miller III, the former Reagan budget director who plans to make a second try for a U.S. Senate seat in 1996.

"The governor has shown great courage" in proposing budget reductions and a tax cut, Miller said. He dismissed the overwhelming opposition to Allen's plan demonstrated at the hearing, saying, "The people who turned out are those whose ox is being gored. The millions of Virginians who want lower taxes didn't travel to Richmond today."

Before the start of the hearing, which continued into the evening, hundreds of sign-waving demonstrators gathered on the Capitol grounds, forming a gantlet for legislators as they dashed between the Capitol and the General Assembly building.

In other business today, a Senate vote gave final approval to a bill to loosen regulations on interest rates charged by small-loan companies.

The bill would allow consumer finance companies to charge up to 36 percent a year on loans up to $2,500 and would set no limit on loans from $2,501 to $6,000. Such loans now are capped by a sliding scale set by the State Corporation Commission. Consumer groups complained that deregulation, approved by the House of Delegates, will hurt those least able to afford it. "It's the little guy against the big financial companies," said Jean Ann Fox, of the Virginia Citizens Consumer Council. "It's not like they're suffering."

The bill, which passed the Senate unanimously and now heads to Allen's desk, was sponsored by a banker who holds a seat in the Senate. "I believe in the free-enterprise, competitive system," said Sen. Richard J. Holland (D-Isle of Wight), who said there was no conflict of interest because his state-chartered bank would not be affected. "I am in the banking business and ought to know a little bit about financing."

Staff writers Peter Baker and Spencer S. Hsu contributed to this report.

CAPTION: GOV. GEORGE ALLEN CAPTION: JOHN T. 'TIL' HAZEL JR.