The Supreme Court agreed yesterday to decide whether public and private colleges and universities must admit and give special help to students with handicaps judged by the institutions to disqualify them from effectively pursuing educational programs and later careers.

This is the first case to reach the court involving the Federal Rehabilitation Act's controversial Section 504, which says that no "otherwise qualified handicapped individual... shall solely by reason of his handicap be excluded from participating in... any program or activity receiving federal financial assistance."

The case is of unusual importance, partly because one of 11 Americans is handicapped. In addition, the outcome of the case could have an important impact on various federally funded programs in which handicapped persons may participate.

In a friend -- of -- the -- court brief, 27 states, including Maryland and Virginia, and the American Council on Education, the nation's largest association of colleges and universities, charge that Section 504 "is being transformed by administrative excess into a tool of oppression not contemplated by Congress."

Last March, the 4th U.S. Court of Appeals ruled that Southeastern Community College of Whiteville, N.C., was violating Section 504 by refusing to admit a woman with a severe hearing problem to a program that would lead to her certification as a registered nurse.

The disability could interfere with her ability to provide safe patient care, either as a student nurse or as an RN, the college said.

The applicant, Frances B. Davis, of Robeson County, N.C., had been licensed in 1967 as a practical nurse (LPN) and she was in good standing as an LPN when the college turned her away in September 1974.

In connection with her application, Davis was examined by an audiologist at Duke University Medical Center. He found her hearing loss to be moderately severe in the right ear and severe in the left. The resulting imbalance causes what U.S. District Court Judge Robert W. Hemphill later termed "remarkable difficulty in understanding speech."

A hearing aid worn near the right ear brings her hearing to the "outer limits of normal hearing levels," the medical specialist said. In addition, she learned to be an excellent lip reader. In all, Hemphill said, Davis "is skillful in communicating with other people if she wears her hearing aid and is allowed to see the talker..."

The audiologist's report was reviewed for the college by Mary McRee, executive director of the state Board of Nursing.

She said that Davis' abilities "would be inadequate for her probably to identify all of the patients' needs for which she would be accountable or even to pick up some clues to situations which could be quite critical to the point of life/death situations."

McRee also told the college, "We cannot, at this time, predict eligibility or ineligibility for the licensing examination should Mrs. Davis enroll in, and be allowed to complete some several years hence."

By contrast, the director of nursing at Southeastern General Hospital predicted that Davis "could do well" in areas such as "long-term care, a doctor's office or even industrial [medicine]. I do not believe that I can truthfully state that she would not be able to function in any area of nursing with her present determination to continue her education."

The hospital official added, "I would employ Mrs. Davis in our Skilled Nursing Facility as an RN if I had a vacancy... Mrs. Davis could also handle the night assignment on our post-partum unit without difficulty after she is registered."

Heeding McRee's advice, the college rejected an application by Davis, who had completed a preparatory curriculum, to be admitted to the RN program.

Davis pleaded for reconsideration in an informal, drop-in visit to college president W. Ronald McCarter. He granted her request, but a panel of nurses that reviewed the case again turned her down.

Aided by the National Association of the Deaf legal defense fund in Washington, Davis sued, alleging violation of her civil rights.

Although the college had witnesses testify in its behalf, Davis offered no testimony, relying instead entirely on letters, tests and other documents.

Some testimony dealt with situations, such as those in which lip reading would be impossible because doctors and nurses are wearing surgical masks.

Judge Hemphill ruled for the college. The 1973 law didn't cover Davis because she was not, in the language of Section 504, an "otherwise qualified" handicapped person he said.

Admission to a state community college "is a privilege and not by itself a constitutional or property right," so long as the rules and regulations aren't "arbitrary or unreasonable" Hemphill said.

In closing its doors to Davis, the college's single major consideration was its expectation that, on graduation, she wouldn't qualify as a RN, Hemphill said. He went on to say:

"A state has a great responsibility to provide training facilities for producing qualified persons for delivering health care to society. In view of the shortage of such personnel and the great number of applicants... it is completely reasonable and logical for the state to limit enrollment to such persons as are able to meet professional qualifications upon graduation."

Reversing Hemphill, the appeals court ordered Southeastern to reconsider Davis' application on normal academic grounds "without regard to her hearing disability." The trial judge erred in finding her not "otherwise qualified," Circuit Court Judge K. K. Hall said in the opinion for the court.

Moreover, Hall said, regulations drawn by the Department of Health, Education and Welfare to implement the law require the college to take affirmative action to modify its RN program to compensate for Davis' disability. HEW is not a party to the case.

Both Hemphill and the appeals court agree that Davis had a right to sue under Section 504 even though the government hadn't intervened.

In a petition for Supreme Court review, Eugene Gressman, a University of North Carolina law professor representing the college, said that the 4th Circuit decision, if allowed to stand will be "a dangerous precedent... that all institutions must disregard the effect that physical disabilities may have upon one's capacity to meet the physical demands of a program or of a profession."

For Davis, attorney Sy DuBow contended that the college "seriously overstates both the breadth and potential impact of the Court of Appeals decision... The holding in this case is too narrow to warrant review..."

Actually, DuBow said, all that the appeals court ordered was that Hemphill reconsider Davis' application for admission in light of regulations to implement Section 504 that were issued after his decision. DuBow cited the appeal court's express limitation of its decision 'to the facts of this particular case.'"