A fire, touched off by insulation being blown into the attic, erupted in a dormitory at an Oregon college.

The stench from a badly mixed batch of formaldehyde insulation drove a Pennsylvania couple from their home.

The federal government paid for new insulation in the house of 100 poor people in Colorado, discovered it was dangerously flammable and had to pay for removing it.

These are examples of the virtual chaos that has accompanied the enormous growth of the insulation industry. Thr growth has been in response to the nation's desire to save on fuel bills.

Between 25 million and 47 million existing homes will get additional or replacement insulation in the next seven years, according to government estimates.

"If there are significant hazards associated with even a modest percentage of this insulation, a nearcatastrophic level of property damage and personal injury could result," said Rep. John E. Moss (D-Calif.), who has conducted hearings on the issue. Hundreds of fires have been attributed to improperly treated insulation produced by an industry that grew from 100 companies to more than 350 in just two years.

The safety issue, and related economic concerns, are even more pressing now that the federal government will help pay the bill for insulation. The government also will pick up part of the tab for solar heating ewuipment, storm doors and windows and other energy-saving devices.

Anxious to cut energy consumption by Americans, Congress included in its tax-reduction bill credits of up to $300 for insulation and $2,200 for solar ewuipment.

Calculating the tax credit, usually a head-scratching exercise for ordinary citizens, may be the easiest part of the energy proble. Far more difficult for consumers will be learning the best ways to choose safe and efficient products.

The biggest worries are related to cellulose, which may account for as much as 60 percent of the market for added insulation in existing homes.

"Cellulose presents two separate safety hazards -- fire and corrosion," Federal Trade Commission Chairman Michael Pertschuk said at hearings of the House Commerce Committee's oversights subcommittee into insulation problems. Cellulose insulation is essentially paper and must be treated with fire-retardant chemicals to be made safe. Boric acid, the basic fire-retardant, has been in short supply for the past two years, forcing many companies to use other chemicals. Some of these compounds can corrode walls and ceilings, Pertschuk said.

Physical hazards associated with solar equipment are less threatening, but the prospective consumer still faces a bewildering array of choices in trying to take advantage of the tax credit. Solar energy, a new form of enterprise for the United States, abounds with 3,000 manufacturers, contractors and installers. But the plumber or electrician who is a whiz on traditional house work may be a novice at solar ewuipment installation.

About 50,000 houses already have been fitted with some type of solar device. Many more homeowners are attracted by the potential of cutting their fuel bills: the National Solar Heating and Cooling Information Center gets 1,000 to 2,000 calls a week. But solar panels on the roof or three extra inches of insulation in the attic may be a needless luxury if the savings can be achieved another way.

"It may be more effective to wear a sweater and turn the thremostat down two degrees," said Stephen Sims, a staff member of the oversight subcommittee of the House Commerce Committee.

"The key thing is not to make an isolated decision," Sims said. "As an energy consumer, you have to look at the house as whole." Having decided to got into the insulation market, a consumer can take certain prudent steps for economic and physical protection.

Responding to dangers of fire or corrosion from improperly treated cellulose and other insulating materials, the federal government has issued standards for the products. The best advice: Don't buy a product without the government specifications.

Mineral fibers, sold in "bats" or blankets, carry the designation HH-I-521 E if they meet the latest federal requirements. Also, look for a seal by the National Association of Home Builders Research Foundation. This means the product was tested for its R-value, a measure of resistance to heat.

Mineral fiber in loose form is blown into the walls or ceilings by a machine operated by a contractor. The number to look for on the bag is HH-I-1030 A.

Cellulose insulation packages should carry the number HH-I-515 D. Look for brands tested for fire safety and corrosion by a third party, such as Underwriters Laboratory, said Art Johnson, a spokesman for the National Insulation Contractors Association. The package will say something such as "UL re-examination service," he said.

The lisser-used insulation compounds and their government-standard numbers are Vermiculite, 858CI and Perlite, 574B.

"Ask the contractor how long he has been in business, whether he has liability insurance, and ask for the names of some customers," Johnson suggested. "Make sure the products have the government specification numbers. If he never heard of them, just tell him, 'Get out of my house'."

The tax credit applies to 15 percent of all insulation expenditures up to $2,000, or a maximum of $300. The amount of the credit is subtracted from the homeowner's income tax.

In addition to insulation, the credit applies to money spent for storm doors and windows, caulking, weather-stripping and a variety of devices: "setback" thermometers that lower the heat at night and raise it in themorning; furnace ignition systems that replace pilot lights; ewuipment to make flue openings work better and new furnace burners.

The credit does not apply to carpeting, drapes, wood paneling, exterior siding, wood stoves or heat pumps. Any money spent since April 20, 1977, should be claimed on the 1978 tax return, due next April.