We are also setting up Office 365 for our students, which to my surprise initially went rather smoothly until we got to the email part.
I know your frustration, we too use an onsite exchange server and are now trying to either disable the Office 365 mail app (and use our existing web access as before) or integrate the Office 356 app with our own exchange, as we have policies restricting students form emailing outside of our address book.
We are registered on the free E1 agreement for online app access only, so I am not sure why it has given us access to cloud email anyway?
Any help on this topic would be very welcome.