Presumably most people would agree that there are people who are confused about their sexuality.

"Confused about their sexuality" is a particularly uncharitable characterization of a transgender person. Many are not confused, rather absolutely certain. Unless you're using the term "confused" as a polite way of indicating that you believe such a person to be mistaken or delusional, in which case you would be begging the question.

By the way, gender is not the same thing as sexuality.

It would only be a counterexample to that model if the student was correct, but whether or not the student is correct is precisely what we are discussing.

If one models gender as a boolean switch that can be set to either "male" or "female", and encounters an individual who has a combination of "male" and "female" characteristics, their model may not accommodate the new observation. I have watched people (who I previously considered fairly sane) break into a yelling fit when confronted with someone undergoing a gender transition, demanding to know their "real" gender and hurling insults when the response was not what they expected.

I don't know the LessWrong-like answer, so I can only offer you the human, empathic answer.

Based on the phrasing of your question:

whether someone born a male but who identifies as female is indeed female

and the fact that you have posted it to LessWrong, I understand it to be a question about constructing a useful and consistent model of the human condition, rather than about respecting an actual or hypothetical human being. If so, I think you are asking the wrong question.

Your students want to learn from you, but on a more basic level, they want to feel safe with you. If you have a trans student, or a student with a trans friend/relative, she is likely to take your answer to this question very personally. Your choice boils down to whether you offer a personal welcome (by recognizing your student's identity) or a personal affront (by implying that you have more authority than she does to determine who she "really is").

I should add that it is a common failure mode for humans, when confronted with a counterexample to their existing model of the human condition, to insist that their model is correct and that the fellow human they are dealing with is a bad data point. As well as rude and demeaning, this approach is irrational and intellectually dishonest.

LessWrong updates the truth to fit its priors.

Them's fightin' words, Random Profound Deep Wisdom Generator!