I’m curious - how is this a bad thing?
In sports, it is very common to cut players who do not have enough drive or determination, or frankly just don’t fit into the coach’s vision for his team.
Is it better to sit on the bench game in game out or be cut and move on?
Why should musical theater be different? Is it better to get bit parts every year or be cut completely so you can move on?
Coaches all the time have absolutely no problem blaming the player for any perceived shortcomings and not themselves for picking the player. When it comes down to it, if in either case (sports or musical theater or any performance type) you are talking a few hours at best to figure out if someone is “the right fit”, and then you are committing. Like marrying someone after going on a two-hour date.
Both parties should be able to change their mind, as long as there is some kind of warning and not “sorry you’re out” when it happens. Enough warning so the student can transfer for the next year seems fair to me.