The Department of Education should be turned into the federal equivalent of a "three-room schoolhouse" to make it "into an agency of minimal nuisance" in the next four years, according to the Heritage Foundation.

"The establishment of a Cabinet-level Department of Education was an historic blunder," says the report, due Dec. 7, "a combination of overweening federal ambition and pandering to interest groups."

Recommendations to rectify that blunder -- being circulated among top administration officials -- would radically transform the role of the Department of Education, turning it into a check-writing agency, a statistical collection center, and a "bully pulpit."

"The first room would house a check-writing machine and teller's window," the report says. "It is the room from which federal funds are disbursed to states and localities, occasionally to schools and colleges, and very occasionally to individual recipients.

"The goal would be to issue only a small number of checks -- though the amounts involved might be substantial."

Under the recommendation, essentially all federal aid to elementary and secondary education would be handed out in the form of block grants -- with no specific stated purposes -- rather than categorical grants earmarked for certain uses.

States and local school districts should decide how the money would be used, says the report, "Mandate for Leadership II: Continuing the Conservative Revolution."

Significant changes are proposed for federal aid to college students to prevent middle- and upper-income students from receiving college grants. "Loans of convenience for nonneedy students are fine," the report said, "and federal guarantees for such loans are acceptable, but they must entail no net subsidy, and very serious penalties should apply to borrowers -- many of whom move into high-paying professions -- who do not repay their loans."

Subsidies should be concentrated on qualified, needy students, the report says.

"They should no longer be available to students who can, perhaps with the help of their families, pay for their own education, or to students who are not interested in attending college but are wooed by student-hungry institutions holding out the lure of federal assistance . . . ."

The purpose of the funds "is not to increase the fiscal comfort level of the upper middle class, to relieve parents of their responsibility to educate their offspring, or to assist otherwise noncompetitive colleges to keep their classrooms full of otherwise uninterested students," it said.

Federal funds should be " 'wholesaled' to the colleges and universities for them to 'retail' to qualified, needy students."

"With an emphasis on the qualified," Eileen M. Gardner, author of the report's chapter on the Department of Education, said in an interview Tuesday.

"I know people don't like test scores," she said, "but it seems to me the best measure of postsecondary success is the Scholastic Aptitude Test." A "qualified" aid recipient, she said, is one with "demonstrated academic ability on solid, substantive, high-level tests."

Gardner, education policy analyst for the Heritage Foundation, said she recognized that using test scores as the single measure of ability might have a negative impact on minorities.

"Absolutely the opportunity ought to be there for everyone and anyone who can demonstrate academic ability to have the opportunity to go on to higher education," she said. "And if there are imbalances, as a result of that, it's quite all right.

"If, for instance, a disproportionate number of a certain minority group is excluded by that standard from going into higher education, that's all right. That does not make that group or that individual of less value."

"One of the things in our society is that we have confused an individual's worth with an individual's academic ability, and we need to decouple those two concepts."

Enacting legislation that would require students receiving federal financial assistance to adhere to minimum academic standards, and encouraging state initiatives to establish tuition-tax credits and education vouchers are among the Heritage Foundation's 1985 initiatives.

Among its four-year goals is abolishing the Office for Civil Rights in the Department of Education.