My little girl did the same thing - not just at school but also at home. I called a psychologist to find out what to do about it and was told to tell her that it wasn't O.K. The psychologist said that some behaviors aren't socially acceptable (like picking one's nose) and that parents need to make this clear to kids. But I was also told that this activity is a "soother" for many toddlers and that I would have to find her another soother instead because kids can get addicted to masturbating (unbelievable!). So I got her a teddy bear that has an insert for essential oils like lavender. She loves that thing and the lavender calms her nerves. It is definitely helping. Now when she tries to rub herself at home, I threaten to send her to a thinking chair and that seems to stop her. I told the teacher she can send her to a thinking chair in the classroom without mentioning what she was doing wrong and I explained to my daughter that this is what would be happening. Ever since I explained that, she just stopped doing it.