Most universities seem now to include IP rights grabs in the matriculation documents you have to agree to when starting your course. If you squint, and apply a dose of salt, the OPs side of things sounds like a compromise offer to move forward allowing the student not to give over current IP but to develop something new.

Depending on contracts, and local laws, that might be almost legal...

Realistically, and obviously I'm not a lawyer, but if it was developed as part of a course, I can see how that might (not saying I agree with it) make the IP rights assignment more complicated and maybe the university would have a leg to stand on?