Quote Quoting DestinationUnkown
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I am not talking about the questioning. The part that I feel might be extortion is when the police officer told them they had 2 options, to turn in a larger drug dealer or to be kicked out of college. Police also have no control over sentencing and by threatning the two people in question feels wrong.
Police officers are allowed to make deals with suspects.

However, you are correct. They have no control over sentencing. Police officers are, however, allowed to LIE and say they do.

Also the whole ordeal about talking to a dealer and setting up a meeting to purchase drugs doesn't seem like something a police officer is legally allowed to do.
Happens every day.

I was under the impression that only a district attorney or ADA can set this up.
You are incorrect.

It also seems like the police are putting my two housemates in physical danger by forcing them into this situation.
Then they should refuse the offer.