To the credit of the archdiosese they have let the kids continue at the school.

I'll respond to this as a Catholic parent and small-l libertarian.

The Catholic Church is a voluntary organization. It has rules. No one is forced to comply with them. However, to participate in its activities you cannot, at minimum, be in public opposition to its rules. The Catholic Church teaches that homosexualit conduct is a sin. You can pick one, or the other -- be openly gay, or be Catholic. People like Andrew Sullivan keep hoping that the Church will quietly drop this rule, but I am perfectly sure that it will never do so. Those who wish to hate and despise the Catholic Church for this teaching are free to do so, and they do, loudly and clearly. Free speech is fine and no one is required to like my religion and most people don't.

So, you have two gay parents who want to send their kid to a Catholic school. Parents of children in Catholic schools, depending on the school and how it is organized, typically have to commit to raising their kids according to the Church's teachings, to reinforce what they are taught in school. The two gay parents obviously cannot do that. They have no "right" to send their children to a Catholic school than anyone has a "right" to force themselves into any private organization whose basic principles they disagree with.

I would think any libertarian-minded person would see very clearly that freedom to associate with others of your own choosing is a basic right. What the government may do is another matter entirely, of course.

As to whether it is practical or wise to exclude the kid, that is another question. I see no problem with it.

This does not conform to my understanding about how Catholic education works: IIRC, Catholic schools have had increasing numbers of non-Catholic students for decades, particularly in the cities (where they are often the only vaguely affordable alternative to public schools that sometimes fail the children they are supposed to teach).

If the requirement for families who want their kids to go to Catholic school is that they themselves be Catholic, that is another matter entirely, but it's never been my understanding that such is the case.

And, again, the parents who don't want their kids rubbing elbows with children whose parents choose to live a gay lifestyle might want to take a look at their own "Christian principles." They are attempting to punish the children for something that is most certainly beyond their control.