Move her. I teach kids drama and run an amdram company, and that shouldn't be happening in a 'teaching' group.
I know why it is, though. There is something of a conflict between 'teacher' and 'director'. Teacher absolutely should be ensuring fairness and learning opportunities for all, but Director will naturally tip towards 'bankable' casting. Its hard to igmore a child you know can handle a role and give a solid performance, in favour of an unknown. A 'weak' lead can really limit a whole show and causes stress for the whole cast.
Also, whilst there will be nepotism in force - she needs those kids on her bottom line because they do pay her more - there's also knowing she'll have that extra time with them every week. The other kids don't only need to be as good - they need to be as good in less rehearsal time.
Too, there is pressure on the business for every show to beat expectations, because if it doesn't then parents do pull their kids for somewhere 'better'.
The conflict is why we pulled in an external panel for our show, who knew nothing about the kids. Then stuck to their results.
But, yes, move her and tell the teacher why. A taught class should support all the children fairly.