The professor might be doing the students a favor.

When I was going to school, a D was worse than an F. If you got an F, you could retake the class and have the grade replaced. 

If you got a D, it's still not considered a passing grade, and you would still have to retake the class. Then you would get the average of the previous and new grade AND the transcript would show you getting a D in the class.

It seems a bit harsh that failing would result in dropping out of the program though. Are you sure that's what the consequence of failing is? No chance to retry?