He told the students to pay money towards classroom renovations and he gives them grades accordingly
The teacher does not have the right to take anything from the students, even if that this for the purpose of renovating the classroom, because that is not the responsibility of the students; rather it is the responsibility of the school. This money in many ways is similar to the haraam maks (customs levy or purchase tax) – see question no. 39461 concerning the prohibition of the maks.
Marks for participation are only given to students for their efforts and hard work in their studies, not for giving money to the teacher! The same applies to grades in the test, they should be based on what the student has written on his test paper, and have nothing to do with renovation or adornment of the classroom.
If the teacher gives marks to students in return for them giving him money, this goes against the education system and is also wronging people with regard to their wealth, and exposing the poorer students to embarrassment when they have to tell him that they cannot pay all or some of the money.
The teacher has to fear Allaah and give each student the grades that he deserves according to the education system that is in place. He should not ask the students for money, no matter how little.
The teacher should encourage the students to donate money for repairs to the classroom, or for any other charitable cause. That comes under the heading of cooperating in righteousness and piety. It also makes the students get used to spending money on charitable causes. But that should have nothing to do with the grades that the students get.
And Allaah knows best.