Keep what you have! And, stop looking at the memory gauge! 🙈 😁
What matters is what the laptop feels like in use — and you’ve said you feel no lags or slow downs. That’s the real sign right there — and it's a good, positive one.
The M series chips are designed to use all the RAM they can, so you'll sometimes see yellow in the memory gauge. Plus, if they ever run out of RAM, they'll spill the excess to the fast SSD in virtual memory.
As to screen size…. Years ago, I had a 15” MacBook Pro as a teacher and was really worried about downgrading to a 13” MBA — because of the smaller screen size. Turned out not to be an issue. I found its smaller size a delight.
I also found that putting the dock on the right-hand side — and turning on hide-show for it — solved many of the smaller screen issues. I keep key apps in the dock and can easily switch among apps that way or by arranging their windows so one is in the background over to the right where a simple click brings that app to the front.
You can also manage zoom factors for different apps.
Your M1 MBA has all sorts of plusses — no fan, no notch, long battery life, efficiency, great power, and light weight. It's a huge improvement over the 2015 13” MBA that I still use. Your M1 MBA is the perfect laptop for a school teacher, especially if you are taking it to and from school. You can always buy a larger external monitor for home or your teacher's desk for the times you need a larger screen. That would be a lot less expensive than buying an entirely new, larger 15” MacBook Air. (You mentioned budget concerns — that alone suggests sticking with what you have — which is already a great laptop!)
Think of something else, too. If the inevitable or likely happens — the laptop get knocked off or falls off the classroom desk and breaks in some fashion — it's an older, less expensive computer, not your brand new one!
The problem with the M2 base models isn't the 8 GB RAM, but the SSDs being single slot and slower. Most say it doesn't matter. In any case, upgrading the SSD capacity on a new 15” MBA would cost you even more money.
May I ask what the situations are when you feel cramped by the screen? Do they really interfere with getting your work done? There may well be workarounds people can suggest, too!
Your M1 is relatively new. Macs can last 5-7 years, so I'd recommend you wait on replacing it until it's much older — then, the new laptop you get will have even more features and be even better than this year's 15” MBA!
New Apple laptops are always enticing, but we often want them more than actually need them!