I was academically dismissed in May 2014 from LS. I'm still slightly financially bitter about it but thought my reply could be of some use to your friend's dilemma (and other future readers).
The reason for my academic dismissal was due to onset of depression from the unexpected passing of my eldest brother 2 weeks into 1L. I was in rough mental shape but my dear professors didn't leave me to fall after missing 3 days of classes from attending his funeral. They truly did care and it showed through a few extensions they granted me and agreeing not to call on me in class for a couple weeks afterwards so I could catch up on readings. Unfortunately, I was unable to muster enough focus after his death to obtain a 2.0 gpa after my 1st year. Now, as for your friend's dilemma...
To begin, I earned all Cs in my 1st semester and completed all assignments/passed all my exams so perhaps that D & F she received pushed her gpa to a 1.4 but even with 1 D & F, it's hard to understand how the rest of her grades combined amounted to a 1.4, especially after at least 24 credits completed (as standard for 1L's). I received all C's in 1st semester and 2 D's and C's in my 2nd semester, and even then my gpa didn't fall below a 1.9...After missing the 2.0 gpa requirement, I was dismissed. After weeks of research, I decided not to start over but the following is based on my research.
You asked what she should do. FIrst, if I were her, I would not worry about financial aid or in state-tuition being denied. At any collegiate level, per the DOE, failed courses may be taken a 2nd time without affecting a student's eligibility for financial aid (unless your school doesn't allow retakes, which would then force her to leave). Problem with most law students is that they must earn a C or better in almost every course to avoid academic dismissal in the 1L year (unless their school's minimum gpa is lower than a 2.0). Anymore, there is a petition process that I didn't research much on because I knew if I returned to law school, I'd ensure I'd pass each requisite course with a C or better. It's up to your friend to determine if she's capable of passing her classes again with a C or better so as to avoid any issues beyond the repeated course threshold for financial aid. I noticed you updated...your law school is remarkable in their offer of allowing her to retain her scholarship and begin over....but I'm still going to delve into what may happen for other students not so lucky.
Any scholarship....unless your school is out of this world generous as the OP's school proves to be, most likely won't follow after reinstatement. I didn't have a scholarship but some of my fellow law classmates did and due to not meeting GPA requisites after 1L, it ended. No petitioning allowed. One was .03 points below the scholarship threshold, too. They wished they had left after their scholarship ended..hint hint. Anytime grades are too low, scholarships easily dissolve. It's money schools will take every effort to avoid paying out if a student's performance doesn't hold up.
My law school eventually offered to have me start over (without me petitioning for reinstatement from where I left off because of my brother's death; that's how understanding they were) but I couldn't and still cannot fathom repeating and re-paying ($40,000 value) for every course I already passed (at least not yet). I cannot blame them for wanting me to retake every course over. They need to keep their ABA standards high and truly wanted to see me happier with a clean slate/gpa. If I would have just continued off from my dismissal, my gpa would have been low throughout 2 & 3L, even if I earned all B's or higher until graduation. Some may think their was a financial incentive for their offer but there are many aspects left unresolved if this were sole reason.
Back to your friend, as for failing of her final due to a 2nd outline, for anybody else who may be in this situation, if it truly was an honest mistake, I'd hope that the academic dismissal committee would weigh presented evidence and readmit you, especially if the previous D was truly a result of exam software failure. If there are other issues on top of these two issues, I hope there is extenuating circumstances like a death in immediate family or a true emergency going on to help persuade them that everything was out of your control. If it was partially in your control, it would be better to admit your mistakes and then present a plan, a plan that would allow your school to see that if followed, your grades will improve sufficiently. I was initially encouraged by my school's dean to seek a therapist for depression and then outline a plan of action and present it to my school that would prove I would be capable of working through the rest of my courses until graduation (or starting over) but ultimately I didn't have to do this as the dean agreed to allow me to start over without this evidence. Reason being because a majority of my professors vouched for my academic excellence in their classes in the midst of dealing with a devastating loss. Will any of your professors vouch for your integrity/academic potential? Perhaps this would help dean see you were truly mistaken/had bad luck.
If I were in her situation, I would drop out and re-apply elsewhere. Her being caught with an extra outline is major in the eyes of outsiders (and likely your current school) as it is indicative of a serious ethical issue (whether it was intentional or not). It's going to be hard to understand why she was mistaken in bringing an extra one into an exam, when the rest of her class was able to abide by the limit, and thus most will automatically assume it was intentional. Back when I was attending, a 3.4 gpa fellow student of ours was dismissed for what he described as unintentional plagiarism...it proved that even an ounce of doubt in ethics is too much to overcome. This was also in 2014 when law school enrollment was dire. Her best bet is to leave because her ethical issue will negatively follow her at your current school. She will have a much higher standard to live up to, already stressful enough. It's shocking she will be able to keep her scholarship, even after taking a year off...especially considering all of this. Very lucky.
Ending, hopefully, your current school won't mark her record for cheating, this would be a godsend for her. Hopefully, she connected with a few of her professors who can vouch for her integrity.
For those wanting to know about how long one has to complete law studies...it's 7 years per ABA standards but one may petition with documented extenuating circumstances and their law school's backing for the allowance of additional time. Anything is possible...as witnessed via this thread.