The pricing is certainly off-putting to many potential buyers. I'm already looking forward to the second gen laptop here: depending on the reaction/payoff Microsoft encounters from it's release and long-term sales, they could make significant adjustments to pricing, or give you more for the same price without Windows 10 S.
10 S is going to be a tough sell to college students - buy a Macbook, which upwards of 75% of college students own and use now, get a seamless, restriction free experience. Buy a Surface Laptop, still expensive, and it comes with a bunch of "Can'ts". Students are sometimes asked to download programs for their classes by their professors for projects, for example. What happens when they need to download one that isn't 10 S compatible? They'll either upgrade to pro or just use a school computer, but that's a big problem for 10 S because it just inconvenienced its user.