Answer
In the Name of Allah, Most Gracious, Most Merciful.
All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.
In this fatwa:
It is advisable that students who celebrate Christmas lead the participation in the nativity assembly, including participation in the songs. Students who are not of the faith can respectfully observe, learn, and, with family consultation, take part as fits their conscience.
In responding to your question, Sheikh Ahmad Kutty, a senior lecturer and an Islamic scholar at the Islamic Institute of Toronto, Ontario, Canada, states,
Religious celebration in secular societies
It is my understanding that in a secular but pluralist society, religious celebrations are not mandated to be observed in the classroom but, rather, taught about in order for students to learn about each other’s traditions and backgrounds. As such, the manner in which they are explored is usually left to each teacher’s discretion.
From your question, it appears that your school is having students take part in depicting the nativity scene, which is a representation of the birth of Jesus (peace be upon him), often done in celebrative settings.
For a Muslim, the problem here doesn’t lie in the actual expression of happinees at his birth, as Jesus (peace be upon him) is a cherished Prophet to us, but the fact that nativity scenes are part of a group of religious iconnagraphy that may lead to worship.
Islam and iconography
Islam is against any religious symbols that can be used in worship, as iconography has historically led to idolatory in a variety of faith traditions.
However, it is important that all students feel respected in regard to their beliefs and backgrounds. Islam is a religion which recognizes and respects the diversity of religions and human experiences.
What should Muslim students do?
Therefore, in this case, it’s recommended that students who celebrate Christmas lead the participation in the nativity assembly, including participation in the songs.
Students who are not of the faith can respectfully observe, learn, and, with family consultation, take part as fits their conscience. This can similarly be done for other religious celebrations like Eid (which needs to be led by Muslim students and not you as a teacher of a diverse group of students), Diwali, Rosh Hashanah etc.
In organizing things this way, you as the teacher avoid leading the observation of faith traditions that do not align with Islamic beliefs while still maintaining the respect of diversity of religions mandated by Islam.
Additionally, this method has a pedagogical win as well; while students learn about each other’s traditions, they also learn the leadership and collaborative skills involved in teaching others about an area they are experts in.
Almighty Allah knows best.