Fact #1- The "Fair Use" part of the US Copyright Law says that in most cases you can allow your students to use copyrighted material such as songs, photos, and other media as long as the finished product is not going to be reproduced and distributed.
Fact #2- In real life (outside the classroom) doing the same thing is illegal and a violation of copyright law punishable by fines and/or jail time.
Because of the latter I always recommend that teachers give their students the tools and information to complete projects using free, public domain alternatives. Say for example you assign your students to create a Power Point presentation on a specific topic. In the assignment you mandate that the presentation must include at least one graphic on each slide relevant to this topic. Rather than allowing the students to go out on the web and “steal” images from other sites, demonstrate how to find legal content during your initial presentation. Such photos and other content are easy to find, just do a Google search for “public domain photos,” or “royalty free photos,” for example. One of my personal favorites is the Stock XChange but there are many others.
Another good alternative that some schools possess is a site license subscription to a clip art service. For a flat fee schools and local area education agencies can purchase annual subscriptions to various sites which allow their students and faculty with free, legal access to thousands of copyrighted photos that can be used in most kinds of presentations without restriction. The site Clipart.com offers this type of service.
Remember, while some sites openly allow you to use their images in any publication you choose, others will restrict what you can use it for and how it can be reproduced. Always check the usage policy or copyright policy on the site before using any images or other content in a presentation. By insisting that your students follow these rules you are helping to instill a definite sense of right and wrong in regard to this very "grey" issue.