if students aren't forced to live there... some students might be fine with it while others will hate it. if the University provides this as just one of many options that students can choose or not... some students may prefer a room of their own without a window to sharing a windowed space with room-mates.

Will it cause damage? heck, in Japan people sleep in pods. Humans are flexible. Not everyone will WANT to live like that, but some will be fine with it.