I agree with their decision: the valedictorian should be from the graduating class.
Well I think it depends how you define things. It's very American to have this "Senior, Junior, Sophomore, Freshman" thing. I think they're arguing that if you're graduating, then you're in the graduating class. She has all the credits necessary to be in that class, and to attend graduation. Graduation is all about earning credits. In fact, you'd think that by having a heavier workload, the younger person in this case is probably smarter. I don't know why you have the mentality that one person is "entitled" to be valedictorian, which should be about being the smartest person graduating that year. Using just sense (and with no understanding of what is proper in the US), the smartest person should get the honour of being named Valedictorian, not the smartest graduate who has been there for exactly 4 years. That last requirement seems rather unimportant when compared to the first requirement.