The problem is with the cloud integration not necessarily with the Microsoft part so if Microsoft wanted to they could sell an version of office to the school with the cloud functionally disabled or changed to point to an on-prem SharePoint installation but this is the smallest part of why school administrators like o365 and google apps.
The problem is that when you look into the email/groupware market and particularly how to manage devices/accounts, something both o365 and google apps(with Chromebooks) offer as a part of the cloud subscription, so now your kind of dealing with implementing authentication, file hosting, email, chat and a whole lot of associated problems based on picking individual solutions for each part of the puzzle.
What the regulators expect will happen is that smaller local companies will start selling integration services to the schools because that's how it worked when IT was introduced to the marketplace. But that market have been decimated over the last few decades so it's not obvious who in the local markets can still do it as the big vendors have been positioning their training offerings and best practice guides towards less locally controlled infrastructure.