The Supreme Court ruled unanimously yesterday that educational institutions don't have to lower or substantially modify their standards to admit handicapped persons.

The court held that no such affirmative action is required by the 1973 Rehabilitation Act's Section 504, which says that no "otherwise handicapped individual . . . shall solely by reason of his handicap be excluded from participating in . . . any program or activity receiving federal financial assistance."

Acting in the first test of Section 504 to reach them, the justices rejected pleas by the federal government and organizations including the American Association for the Advancement of Science. The 9-0 ruling, which had been sought by 33 states (including Maryland and Virginia), reversed an earlier decision in the matter by the 4th U.S. Circuit Court of Appeals.

The case involved Frances B. Davis, 46, who compensates for a severe hearing problem with a hearing aid and skilled lip-reading.

She was licensed by North Carolina in 1967 as a practical nurse, and wanted to become a registered nurse. But in 1974, the Southeastern Community College in Whiteville, N.C., refused to admit her to its RN degree program on the ground that her hearing limitations could interfere with the safe care of patients.

The program was designed to train students to perform safely in all situations encountered by trainees and RNs, Southeastern said. But, it said, Davis couldn't do that. For example, the lip-reading on which she relied would be useless in operating rooms or in intensive-care or post-natal units, where doctors wear surgical masks, the college said.

Davis filed a lawsuit alleging violation of Section 504. A trial judge dismissed the suit, saying Davis was not, under the law, an "otherwise qualified handicapped individual."

The 4th Circuit agreed with the judge's factual findings. But it held that he had misconstrued Section 504 by taking Davis' handicap into account in determining whether she was "otherwise qualified" for the program. He should have confined his inquiry to her "academic and technical qualifications," the appeals court said.

While the appeal was pending, the Department of Health, Education and Welfare promulgated regulations to implement Section 504. These, the appellate court concluded, required Southeastern to reconsider Davis' application for admission to the program "without regard to her hearing ability."

Moreover, the appellate court suggested, Section 504 required Southeastern to accept "affirmative conduct" applicants with disabilities, even if the adjustments it would have to make "become expensive."

The American Council on Education, the nation's largest association of colleges and universities, disagreed. It charged in a friend-of-the-court brief that Section 504 was "being transformed . . . into a tool of oppression not contemplated by Congress."

In the opinion for the Supreme Court, Justice Lewis F. Powell Jr. said that the language of Section 504 does not require educational institutions to disregard the disabilities of handicapped applicants. Instead, he said it indicates "only that mere possession of a handicap is not a permissible ground for assuming an inability to function in a particular context."

If the 4th Circuit ruling were to be taken literally, Powell said, it "would prevent an institution from taking into account any limitation resulting from the handicap, however disabling. It assumes, in effect, that a person need not meet legitimate physicial requirements in order to be 'otherwise qualified.'"

Relying part on a HEW regulation, Davis had argued that Section 504 required Southeastern to try to train her for some, rather than all, of the tasks that a RN is licensed to perform.

But, Powell said, the case record indicates that the degree of modification of training programs contemplated by the regulation wouldn't nearly suffice for Davis. For example, he said, the evidence "indicates that nothing less than close, individual attention by a nursing instructor would be sufficient to ensure patient safety. . . ."

Consequently, he said, Southeastern - "with prudence" - could let Davis take only academic classes. "She would not receive even a rough equivalent of the training a nursing program normally gives," he said. That would be "far more than the 'modification' the regulation requires."