I like your philosophy. I encourage 'school appropriate subject matter' in
my student's work. I never thought to offer the students the opportunity to
have total freedom, but no grade. I also allow the advanced students a lot
of latitude, especially when they are preparing for the AP. It is a
college-level course and I treat it as such.
Overall students just have to know where/when things are appropriate. In a
private sketchbook they should be able to express themselves. It is hard
being a teen and being bombarded with so much from the media that they do
need a place to help sort things out. But, just as inappropriate language is
not tolerated in the school, inappropriate subject matter i.e. drugs,
weapons, alcohol has to be addressed.