Have them make Christmas ornaments. There are a bunch of websites that give instructions and pics for really inexpensive, simple things.
Best drinks to serve: Capri sun drinks. They don't spill easily! Avoid cupcakes. Kids make a mess of them.
Ask the teacher if any of the kids have allergies. If any of the kids have a peanut allergy, avoid giving ANY of the kids stuff with peanut or peanut products in it. Some kids' allergies are so severe that it can make them sick just to be in an enclosed area with the stuff. And it would be really bad to mistakenly give someone something they were allergic to.
Also, before you start handing out goodies at the party, spread sheets of waxed paper onto each of the desks or tables. The teacher will thank you.
Here's a cool website for craft ideas: