Water spilled on MacBook keyboard - what now?

Depending on how much water and where it went, you may have created a short
that could cause a very expensive repair (but even so, not that much IMHO - I would
definitely try going to Apple directly and let them quote).

On the other hand, patience might serve you well here. Let the machine dry thoroughly
and the problem may resolve itself. Remove the battery so air can get in; try leaving the
machine upside down for a while, etc. Many water spills are not fatal.

Good luck!

Should spilling water on the keyboard cause this much damage

It certainly can; I've seen it happen. The liquid gets down into the electronics and shorts them out, ruining the circuitry.

and should it be covered by warranty?

No warranty will cover such damage, any more than your car's warranty would cover you driving it into a tree.

I really can't afford to pay this much to fix it or to buy a new machine, but he really needs to have it fixed to finish the school year.

Perhaps your homeowner's warranty would cover such damage? Or if you bought the system on a credit card, some card services provide coverage for such damage, so you can check with the issuer of the card.

The school didn't contact Apple to consult on the cost of repair or what was required - should we take it directly to Apple?

You certain can, and probably should just to get a second opinion. But if they have to replace the logic board and the keyboard - quite likely when spills occur - it can easily cost close to a thousand dollars. And if the screen were to require replacement as well, you quickly approach the cost of a new Mac (logical; you'd be replacing most of the MacBook). There are some third-party repair shops that might cost less; do a web search for "macbook repair" and you'll find several. I haven't used any of them so I can't make any specific recommendations.

Good luck.

P.S. For the future, if your homeowners insurance or credit card doesn't cover the repair, you might consider getting laptop insurance on the system. Safeware is a vendor my university suggests. I don't have exact costs, but it's on the order of $75.00 per year and will cover just about any damage or theft.

My girlfriend spilt some mountain dew on my macbook one night after a little bit of alcohol. Thank goodness I was comprehensive enough to tell her to instantly take out the battery, and hit it with a rag asap. I happened to be puking at the time. So the next morning I was a bit worried, quite a bit actually. But all went well, except for some sticky keys. Then I soon after got the split of the keyboard housing around the front edge of the border, which means an entire keyboard replacement and everything.

All in all, sometimes you just get lucky. Other times you don't. I wish you luck. Try apple, they might be able to help you better.

It still amazes me that an expensive MacBook can be completely obliterated by a water bottle spilling on the keyboard,

Just so you know, this is true of any notebook with the possible exception of those that have been specially ruggedized. Very few consumer electronics items are water-resistant. So this probably would have happened with any notebook computer you might have purchased (we've replaced several Dells due to just such spills). There are keyboard skins you can buy that can help with liquid spills, though they're not absolute protection. Better just to keep liquids and food away from the device.

Regards.