File permission confusion

On a windows 2003 file server I have a structure for the following:
Classes (shared)
Teacher
class projects
Student folders
My objective was to control what a student sees when they logon. Specifically a student has access to a common folder “class projects”. A student can see all student folders but can only see files created in their folder. Now all of this works great except for one problem. When the teacher opens a student document and corrects the document, the student can no longer see that document which is still in their folder. Why is the teacher access causing the student permissions to be dropped from the file that was created by the student?