I think you conflate "support" with "failure to completely stifle her free expression". And, of course, there is the question of whether this is really defamation.They knew exactly why she was doing it and supported her in this endeavour. That makes them liable for the damages resulting from this defamation.
It's not a case of their "failing to stifle her free expression", it's a case of their actively supporting a criminal endeavour by rewarding her with course credit for engaging in the crime. If a professor approves a project to shed light on the dangers faced by sex workers by having a student follow someone around and publically accuse him of murdering a prostitute, then that guy has a case for damages against the university because their act of rewarding the student for committing the crime by giving her grades for it no differently than he'd have a case against someone who paid a person cash to follow him around and make those accusations against him due to a personal vendetta.
This has nothing to do with free expression beyond that free expression is limited by not allowing one to use it to defame people.