The Replace User feature can only be applied when the person replacing the existing user is brand new, and not part of your subscription. This includes users who were invited but have not yet accepted their invitation.
This feature can also only be applied if the existing user does not have any licenses or roles outside of the ones managed by the Subscription Manager making the change.
Resolutions:
If you receive a message that the user cannot be replaced, simply move or drop the students and remove the existing user.