Good questions! I'm glad you were able to get it up & running and good to hear you like it.
1. Unfortunately yes. I will discuss this with the Live@EDU help deskk shortly and see if they can allow us to "bypass" that activation... Or prehaps pre-fill it as you've suggested.
2.1 / 2.2: I like you're second option better than the first... Maybe showing the user their password is a bit funny, but having a "password reset" feature, especially if they can choose what they want it to be, would be excellent. I'll add it
to the development list.
By the way, where are you from? It would be great to have a list of Institutions using the web part.