Live tooling on a small machine is gonna be a toughie!
Can you work with doing the milling as a secondary op, or use a milling machine with fourth axis to make the part?
Emco makes a training lathe that has live tooling, but it isn't anywhere near my price range. Pretty much beyond most school's budgets too, I think. In any case, not thick on the ground.http://www.emco.co.uk/product/ConceptTurn250
Before the weekend, someone had posted a link to a brochure that covered the "Concept" line of both lathes and mills. I'll be darned if I could find it again. May have been in one of the other sub-forums, too.
Pretty certain it was just the older version of the info that is available regarding the current crop of training machines.
The Emco stuff offers up a lot of capability in a package size that is more often associated with pretty low-rent machinery. Unfortunately, their prices are right up there, and add in the transport costs and exchange rates, they don't get very many machines on the ground this side of the ocean.