Well, it depends on context, doesn't it? The same sentence might be completely inappropriate for a medical journal, but acceptable in a poem or a political treatise. What she did was explain to the student in what context either spelling might be appropriate, and allowed him to make the call. HE still knows, now, that the capitalized spelling is what would be correct if talking about the disorder. He just hasn't been shamed for "getting it wrong", and then given no real explanation as to why (the "traditional" approach to proof-checking).
It's okay if you don't agree with this approach, but speaking as a college instructor myself, I can definitely see the virtue in what they are trying to do and will be interested in seeing how it affects success and retention in the years to come, if at all. I'm not an English teacher, so my usual response to spelling/grammatical errors has been to straightforwardly ignore them unless they impact comprehension of the sentence or disrespect an individual or group somehow. For time reasons alone, this is likely to continue to be my policy; I can't teach English and Anthropology at the same time without sacrificing one. But my job would be a lot easier if the English department were actually instructing students on the purpose and context of formal grammars, rather than shaming them for fluency in their own ...