aces low
I've flown the low level corridor a few times and from memory (but you know how unreliable that can be) you can glide clear to a "safe" site if the engine fails.
However, I see your point in that you will be creating confusion in the students mind. You spend time banging one fact into them, only to have them say "but thats a contradiction of what you said yesterday"!
Can't say I know the answer other than to say that you will have sufficient height to glide clear and as that is the maximum height allowed because you are below busy class D, then thats the height you must fly, keeping a good lookout at all times for other aircraft and for a suitable landing site, because of your altitude limitation, in case the donk goes into early retirement !
Hope you solve the problem satisfactorily
jsf