This has bothered me for a long time now. I always thought this would be illegal, and it turns out it is. But schools are run by the government, and you know the government... But I mean I agree with the op, they shouldn't be able to do that. It's stealing.
Same thing with a woodshop teacher I had a few years ago. We were making these wood cars. We paid for them, and they were leagelly ours. If we messed up the car, instead of him telling us "You messed up and have to start over", he would cut our car in half and make us pay for another one. Leagally that's illegal, am I not right? Destruction of personal Property?
Anyway, back on topic... I don't think they should be able to do that, and am not certian if you could successfully take action against them, and win. :/