Is it permissible for a teacher to call students hypocrites, and what should students do in response to that?

It is not in the character of a believer to insult or revile people, especially with the term "hypocrite," which pertains to a person's faith. Reviling a Muslim is an act of transgression (fisq), and reviling them unjustly is forbidden by the consensus of the Ummah, and its perpetrator is a transgressor. The teacher must repent to Allah and cease this reviling. If she calls them by that term to rebuke them for actions characteristic of hypocrites, then even if it is not forbidden, it should still be abandoned. The questioner and those with her should advise the teacher with wisdom and politeness, even if they think she will not accept the advice.