I have a jail setup on a server where my students logon using ssh and they program using vim. My jail setup currently allows them to only work in the directory /home/jail/home/username and only issue select shell commands. I would like to extend the use of an editor or IDE but I don't know how to prevent them from going "up-stream"(outside of their own folder) when they do a file-->open or save from the editor.

When they open an editor from their ssh terminal window, are they opening a child process or an completely independent process? If they are opening a child process, I have a script that filters their commands and limits what they can do. I would think that I could filter commands issued from the editor within this script. Correct? If not, how would I do it?

If they can use vim, and your jail is broken, then they would be able to open an arbitrary file.

???

You are apparently on a UNIXish system, so write permissions (rather, lack thereof) prevents students from saving files elsewhere - provided the directories have the correct write permissions.

And I do not understand why you that jail in the first place, i.e. typical UNIXish setup is good enough.