Thanks for your reply.
I was discounting the computer as the problem, because I can edit the same footage fine in Windows Movie Maker without any problem. But the computer isn’t great. Dual Core, 2GB RAM.
In project properties I used the Match Media Settings function to set the project settings.
I did download Vegas 10, and it ran much smoother there.
Probably the solution is to get a better computer or shoot in a lower resolution. I think my students were all shooting in 1080p. Oops. 🙂