Okay... in order...
I'm going to say FOR THE MOST PART, magic from the game. However, I'm willing to use new ones if everyone agrees they work, or fill a niche that's maybe missing in the original list. I mean, who's to say that Squall and his party found and used every single spell in existence during the game? New materia appeared in Crisis Core, that wasn't in FF7, after all.
I'm open to suggestions on the GF front, but the way I imagine it now, each student gets 1 GF. I know Squall started with two, but for me, one just flows better. Plus it makes GF seem more personal, and special. As for what to use as GFs, I think it'll be a part of the character sheet. You can apply for one from the game (but please, be realistic, they're not going to hand a student Eden), or make up one of your own. Original GFs can either be based on existing monsters in the FF franchise, or completely original, but please try to keep from copying anything else (No Jack Frost or Angel or anything from Shin Megami Tensei for instance), and keep it... ya know... Final Fantasy-ish.
I'm not sure yet, it could be worked into the plot. But if I decide to include one, I think I'll leave it a surprise :>
Old characters I'm on the fence about. I mean, there may be a cameo from some of them (maybe Squall will show up to give a speech if the character's make SeeD, or something), but I want the focus to be on the new, original characters. You can certainly make references, though. I would prefer if no one applied to be a relative of one of the characters, but their adventures would be well known, even if the details might not be. The Lunar Cry, the whole war with Galbadia, Edea and Ultimecia and all that... I'm pretty sure all of that was big news.
At the start, I want to say the main cast are students, probably working to become SeeD. Over the course of the story, maybe we'll witness them graduating and becoming SeeDs. I think it would make it all the more awesome to see them as SeeDs if we get to know them as students first. Kind of like how cool it is to see some of the characters in Naruto as badass ninja after getting to know them as little bratty kids. xD
And on your next point, I agree. I was intending to set the age limit as that. I don't intend for this rp to revolve AROUND sex, but... well... hormonal teenage students in a school, training to become mercenaries where they could die any day... well... stuff happens