Private schools, I guess, are selling a product (their name) and, since they're not agents of the state, can regulate student conduct however they want. Students pay to go there and agree to live by the rules. BYU has some pretty stringent behavioral rules for students, as does St. Mary's College of California. I mention those two only because I myself have talked to students at those schools about their requirements.
State schools, however, need to focus on teaching and forget about social engineering. Some students are going to be idiots and do idiotic things. Sometimes their off-campus behavior will offend others. Rather than trying to punish the entirely legal but boorish behavior of some dolts, schools would better serve their students if they taught the offended students the simple fact that no one has a right not to be offended.
Recently, two public schools have entered the spotlight because they're taking action against students who held theme parties in exceedingly poor taste on Dr. King's birthday holiday. Read here about Tarleton State University in Texas, and here about Clemson University.
Idiotic behavior, inappropriateness, and "insensitivity" should merit nothing more than an official nod to individual freedoms and an expression distancing the school from the particular incident in question. Weeping apologies and NAACP witch hunts merely advance a victimhood culture that is, or at least should be, distinctly un-American. Social opprobrium, not official sanction, is the appropriate remedy here.
Update, 2/11/07: Here's a private school doing the same thing.