If you listen to the broadcast all the way through you will notice that the higher school administration reversed the actions of the local administrator. However, the kids were actually in technical violation of the US Flag Code:
(d) The flag should never be used as wearing apparel, bedding, or drapery.
(j) No part of the flag should ever be used as a costume or athletic uniform.
When I was in school back in the late 60s and early 70s I can recall several hippie types who were sent home for wearing American Flag shirts and shorts.
Edit: here it is if you are interested: