the bottom line of this discussion is that martial arts is not for everyone. some people are in the business to train fighters, and teach people to defend. some are in business to held their hands. i have a problem with schools that advertise they are true martial arts school, when he is really a day care center. there is nothing wrong if you want to make money with the martial arts. but when you try to make it "one size fit all", and not even teach the real art of fighting, and use "good grades, fun, respect, blah blah blah", you are no longer martial arts school.
you are a self defense teacher, not a physcologist. if the boy needs mental help, send him to the professional. dont make promises to parents this is dishonest. "miss, you want your boy to walk with confidence, send him to me, i guarantee in one year nobody will mess with him." but if he's talking back to his mom and dad, tell them to beat his ass. if he skipping home work or cant pass the test, send him to a tutor (or hire one and let them tutor kids. i did this for my high school kids is a great idea).
martial arts is not for everyone, just like gymnastics, just like accelerated math, just like football. either you want it or you dont. give him a excited talk to get him to stay, but dont beg. martial arts is not "one size fits all". keep your arts pure, and hold your head up around the guys in the top of the food chain.