As one who is owed lots of money by many different yeshivos, I sympathize with the school.
I’m not saying that zero tolerance is the best policy, but a clear policy should be reached and adhered to with clear input from the rabbinical board. If the menahel is trying to make exceptions then the secular administrator is correct to overrule him. Not paying ones employees on time is a terrible thing to do and is just as important a factor. The fact that an institution accepts charitable donations to keep it going does NOT make it a public institution. No philanthropist ever told R’ Nosson Tzvi, Zt”l how to run the Mir. Anyone who is unhappy with a school’s policy is free to open his own.
However, ensuring that no child is left to fend for himself is a burden incumbent on the community. Establishing a charity to help pay tuition for those finding it difficult is an excellent idea. Our children are our greatest asset. But the burden should not fall on the shoulders of the rebbeim alone.