I can believe that children who have grown up with web apps and iOS devices are not used to the concept of a directory structure. I can absolutely believe that a lot of people have messy and disorganized hard drives.
But not understanding the concept of files and folders at all, even after the professor spent a class explaining? The people who bought Macintosh computers in the 90s didn't grow up with these concepts either, and they seemed to get the hang of it relatively quickly.
If students have an alternate mental model which works for them, that's fine too! But it sounds like whatever they're doing isn't working, and that doesn't surprise me. You can rely on Spotlight for everything up to a point, but past a certain level of complexity it all becomes a nightmare!
Perhaps the professors teaching directory structure need to rethink their lessons? This just shouldn't take more than a day.