Linux might certainly be the cheapest/most configurable choice, but that all depends on your needs.
A quick mail server can be set up with sendmail and a POP or IMAP server, depending on your preference. Qualcomm makes a decent free server named "qpopper", which you might want to try out.
Be sure to read up on email security, especially things like "relaying" to avoid having your setup abused by spammers (if it faces the 'Net).
I know this post is quite light on info, but it all depends on your desired setup. Will the students read email through a terminal connection to the server (like elm/mutt/pine via ssh), or will they use desktop utilities like Eudora/Netscape/Outlook/etc? Is price an issue? How about "enterprise" support?
Maybe a little more background would help myself and others steer you in the right direction.