I would be grateful if someone could advise me on the course of action I
should take; here's the situation:

I am a student doing a full-time course at a college and have been using
the Oystercard for the past 3 months, and during the time have always
taken the monthly travelcard as this works out cheaper than buying single
journeys. Anyways, today while swiping in at Aldgate station, I got an
error message and went to customer service, they said that my card was
cancelled and simply took it away. They said that I should prove that I
am a student and should apply all over again. I showed them my student
ID card from the college, the NUS card, my notes, books everything that I
had at the time, and they said they couldn't help me...

Why should I apply all over again? How can they cancel my card just like
that for no valid reason? I had over 3 weeks of travel also left in the
card... This is absolutely ridiculous!

Should I call the bank and ask them to reverse the 50 odd I paid for the
monthly travel card? Has something like this happened to anyone else?

There is no way you should have your card taken off you. The student scheme
is designed so that even if you cease to be eligible for the discount (for
example if you drop out of college) you will keep the card and it will
continue to function but will only allow you to buy full price tickets.
Even in this case any ticket you have purchased with the discount will
continue to be valid. The only valid reason for your card to be taken off
you is if it was reported lost or stolen.

You should call the student oyster line on 0870 443 1045 and ask for a
replacement card to be sent to you with your existing ticket on it. Keep
tickets or receipts for any travel you have to pay for in the meantime and
claim a refund for it once your Oyster card arrives (I think the refund
will have to come from the regular Oyster helpline not the student one).