WOULD IT BE better if more high school students failed the competence tests that are now required for diplomas in most states? Last year, 99.86 percent of Virginia's high school seniors passed. So far, 97.5 percent of this year's seniors in Maryland have passed. Does it mean that the tests are too easy?

The tests are doing precisely what they were designed to do. They were never intended to fail large numbers of students and prevent them, at the last minute, from graduating. The central purpose is to identify those youngsters who are functionally illiterate in time to bring them up at least to a certain basic capability before they leave school. Those who do not care to make the necessary effort are warned that they cannot get diplomas by mere chair-warming, and no doubt some of them depart. The criterion of these tests is not the number of students who fail, but rather the ability of those who pass.

The increasing use of competence tests--currently 38 states require them--represents a healthy development in American education. A generation ago, hardly more than half of the country's children graduated from high school, and over the years the schools have worked hard to raise that proportion. Currently three- quarters of all children graduate, representing an extraordinarily valuable--and irreversible--kind of social progress. But it has been achieved at a certain cost in minimum requirements.

A high dropout rate has become a reproach to a school, and a failing grade often becomes an indictment, not of the student, but of the teacher. Under these circumstances, teachers and principals frequently choose to shrug and pass even the least competent students along for someone else to worry about. By the mid-1970s, one out of every eight students leaving high school was in fact illiterate--and among black students, it was two out of five.

The competence tests are an attempt by parents, voters and the community at large to reassert basic standards. It's quite true that these standards so far are rudimentary, demanding nothing that might not reasonably be expected of children entering high school rather than graduating. They test the ability to read simple directions and fill out employment forms. Those who fail are given coaching and a chance to try again.

Perhaps the tests ought to be more demanding, and perhaps in the future they will be. Setting the minimum acceptable level is a political decision. It's a judgment for communities to make, not technicians and experts. But if states want to raise their standards, they now have the mechanisms to do it. For the present, the important thing is the establishment of these tests in principle as legitimate and useful ways to protect children from being misled by worthless diplomas. It means that fewer youngsters are going to graduate from high school unable to read.