One of two things is likely happening - Either your students will need WRITE access to the USER_NAME\APPDATA\ROAMING folder to create the appdata\roaming\arduino\preferences.txt file or they need WRITE access to wherever their USER PROFILE is being stored so that Arduino can write to the sketchbook location.
One possible workaround is to add the following line (without the quotes) to the preferences.txt file "settings.path=c:\Users*User*\WHEREVER THE USER PROFILE IS LOCATED"