Effects of Federal education policy on rural and small school include inequities and neglect. Funding formulas based on concentrations of targeted pupils and average cost per pupil appear to deprive small and rural local education agencies (LEA) of a fair share of Federal education monies. Selection criteria such as density and Education Division General Administrative Regulations (plan of operation, quality of key personnel, time-committed-to-the-job, budget-and-cost-effectiveness, evaluation) penalize small and rural LEAs. Other regulatory and administrative practices that complicate, impede, and discourage small and rural LEA participation in Federal education programs are maintenance-of-effort provisions; matching requirements; paperwork burdens; a propensity to favor large over small grants; and difficulties in obtaining technical assistance and information about Federal programs. Suggestions for a rural initiative include: analysis of formula and criterion effects on rural and small LEAs, rural "set-asides," direct rural communication, paperwork burden reduction, technical assistance participation, improving the data base, identifying and validating successful rural practices, and legislation to compensate for extra costs necessary to assure quality education for rural children. (NEC)