There is no bright line determination. The details depends on how well the teaching falls within fair use. For example, it isn't fair use for a teacher to make copies of the complete works of Borges when the lesson only covers 'The Library of Babel', but making a copy of 'The Library of Babel' will likely fall into fair use.
Even then, if the teacher makes the text available to the students via a public web site, then its availability to non-students puts it outside of fair use.
However, the Z3 license does not prohibit teaching in general. In fact, it says:
"You may use, copy, reproduce, and distribute this Software for any non-commercial purpose, subject to the restrictions in this MSR-LA. Some purposes which can be non-commercial are teaching, academic research, public demonstrations and personal experimentation. You may also distribute this Software with books or other teaching materials, or publish the Software on websites, that are intended to teach the use of the Software for academic or other non-commercial purposes."
How does this have "a chilling effect on the education of some compsci fundamentals"?
If the software is going to be used for commercial purposes, then Microsoft wants some of the action. If you're going to teach how to use the software for commercial purposes, then Microsoft still wants some of the action.