Is the amount deducted from late students—which aims to fund a ceremony and allocate a portion of it as an ongoing charity (Sadaqah Jariyah)—considered unlawful (haram) or lawful (halal)?

Financial punishment of students is not permissible, as jurists have stipulated its prohibition. This is the doctrine of the four Imams; in fact, Al-Sawi narrated a consensus on it. The money taken from students must be returned. If it is impossible to identify each student, then pay what you believe is most likely to clear your liability or seek their forgiveness. We remind you of the Prophet's (peace and blessings be upon him) saying: "Whoever has wronged his brother concerning his honor or anything else, let him seek his forgiveness today before there are no dinars or dirhams, for if he has good deeds, they will be taken from him [in proportion to his wrong], and if he has no good deeds, then some of the evil deeds of his brother will be taken and cast upon him."

If the adult, rational students agree to donate the money for an end-of-year celebration free of prohibitions, then that is permissible. Likewise, if they agree to give a third of the amount as charity to the poor and needy. You have no right to this money; it belongs to those from whom it was taken. If they agree to it – and they are competent to donate – then they may do so; otherwise, you must return it.