Classes begin the next day with Mr. Creakle barging into the classroom and threatening to beat any students who don't apply themselves in the new term. He then walks over to David and hits him a few times with his cane, which Creakle calls a "tooth." Creakle does the same to other boys in the room, and David remarks that the headmaster "had a delight in cutting at the boys." Even now, David says, he still cannot forget or forgive how frightened the boys were of Creakle, and he describes several instances in which he waited watchfully for Creakle to explode at him or someone else. Traddles in particular, as the "merriest and most miserable of all the boys," experiences frequent beatings, and once even takes the blame for an offense committed by Steerforth (laughing in church).
David's deep animosity toward Creakle isn't simply the result of the beatings he personally received. Instead, it seems to stem from his beliefs about childhood education, and his sense that Creakle was uniquely unsuited to the task. In fact, David suggests that Creakle would have been able to do less "mischief" as head of the army or navy than he did as a schoolmaster. The implication, in other words, is that Creakle's actions have particularly harmful long-term effects on children, because they are uniquely impressionable.
Meanwhile, Steerforth continues to act as a protector for David, though he does not intervene on his behalf with Creakle. David, however, remains in awe of him, and Steerforth seems to feel some fondness in return. Steerforth is especially excited when David happens to mention the novels he has read, and asks him to recount what he remembers of the stories to Steerforth every night. Despite the downsides of the arrangement—David is often tired the next day—he appreciates the admiration it inspires in the other boys, and relishes the opportunity to indulge his "romantic and dreamy" side amidst the drudgery of life at school.
Although David's friendship with Steerforth is generally presented as a hindrance to David's growth, Steerforth does provide David with his first opportunity to exercise his skills as a "writer." Though he's technically recounting other people's narratives, David's storytelling sessions require him to draw on his memories in much the same way he does writing the memoir itself. Still, he's clearly not thinking of storytelling as a vocation yet, since he approaches it in a "dreamy" rather than disciplined manner.
The students at Salem generally learn little because of their fear of Mr. Creakle. David, however, does manage to pick up "some crumbs of knowledge" from Mr. Mell, and is therefore disturbed by the fact that Steerforth consistently treats Mell with disdain. He also regrets telling Steerforth about the visit he and Mell paid to Mell's mother. This unfortunately comes back to haunt David one day when Mell scolds the classroom—and then Steerforth in particular—for being unusually rowdy. Steerforth refuses to listen to Mell, instead throwing the teacher's demand that he sit down and be quiet back at Mell. The argument escalates, and Steerforth eventually says he knows—from David—that Mell is a "beggar."
Although Dickens elsewhere suggests that some forms of hardship can build character, it's clear that some experiences simply can't be turned to good use: the students at Salem House, for instance, are in such a constant state of terror that learning is impossible. Furthermore, the one teacher who does seem able to accomplish something is vulnerable on account of his lower-class background. This becomes painfully obvious when he attempts to scold the upper-class Steerforth, who feels nothing but contempt for Mell. In fact, Mell remains a "beggar" to Steerforth, despite the position he's reached in life.
Suddenly, Mr. Creakle enters, and scolds Mr. Mell for "forgetting himself" so far as to chastise Steerforth and to accuse Creakle himself of favoritism. He also mildly scolds Steerforth for insulting Mell, but Steerforth defends his words, and reveals that Mell's mother lives in an almshouse. Mell confirms that this is true, and Creakle fires him on the spot. As he leaves, however, Mell says he hopes Steerforth will one day be "ashamed" of his actions, and that he "would prefer to see [Steerforth as] anything rather than a friend […] to anyone in whom [Mell] feel[s] an interest." Creakle then thanks Steerforth, and most of the students cheer for him.
Like Steerforth, Creakle can't or won't separate Mell from his impoverished background; he claims that continuing to employ Mell would be the same as providing charity, despite the fact that nothing material about Mell's situation has changed. This hints that the mere act of "allowing" a lower-class man like Mell to rise in the world is viewed as a form of charity, over and apart from any actual assistance. Tellingly, Mell is ultimately able to achieve success only by immigrating to Australia, where social class was more fluid.
Mr. Mell's dismissal causes a rift between Steerforth and Traddles, who had cried when he left (and been beaten for it). Traddles accuses Steerforth not only of getting Mell fired but also of hurting the man's feelings, but Steerforth rejects the idea that Mell has feelings in the same way that they do. He also says he will ensure that his family provides Mell with some money. David is pleased with the "nobility" of this speech but also feels uncomfortable with Mell's departure. This feeling fades, however, the more time David spends with Steerforth.
The events surrounding Mr. Mell's firing in many ways foreshadow Steerforth's eventual affair with little Em'ly: Steerforth doesn't really believe lower-class people have feelings, so he also doesn't worry about hurting them. He is, however, willing to recompense them, which suggests one way of thinking about the "logic" behind Steerforth's bias: perhaps the lives of the lower classes are so governed by financial necessity that there's no room left over for "higher" feelings. This is an idea that the novel as a whole consistently refutes, but that nevertheless recurs throughout it.
Sometime later that term, Tungay announces that David has visitors. These turn out to be Mr. Peggotty and Ham, and the three share a joyful reunion, with David crying at the sight of his "old friends," and Ham remarking on how much David has grown. Mr. Peggotty confirms that Peggotty, little Em'ly, and Mrs. Gummidge are all well, and David asks whether Emily has changed much. Mr. Peggotty says that Emily is "getting to be a woman," and comments proudly on the progress she has made with her education.
Although David himself can't explain why he's crying, it's likely a reaction to the contrast between his circumstances the last time he saw the Peggottys and his circumstances now. Although David has, as Ham notes, begun to grow up since that first meeting, the experiences that have forced him to do so have mostly been painful.
At this point, Steerforth accidentally stumbles into the room, and David takes the opportunity to introduce him to Mr. Peggotty and Ham. Steerforth is effortlessly charming with them, and David pauses in his narrative to comment on the charisma that made people want to "yield" to him. Back in the main storyline, David speaks glowingly of Steerforth's kindness to Mr. Peggotty, and says that the next time he visits Yarmouth, he will bring Steerforth with him. The group discusses Mr. Peggotty's house, Steerforth saying a boat is "the right sort of house for such a thorough-built boatman."
Steerforth is in many ways a commentary on the dangers posed by someone who learns to influence events and people but never to control himself. With very little conscious effort, Steerforth is able to bend those around him to his will. However, because he has no guiding light beyond his own impulses and emotions, his influence over others only results in dragging them into trouble alongside him. The fact that the Peggottys are working-class exacerbates this, because Steerforth sees them more as quaint abstractions than real people, as his remark about the appropriateness of their house suggests.
After Ham and Mr. Peggotty leave, David considers telling Steerforth about little Em'ly, but is afraid Steerforth will mock him for his infatuation. He is also "uneasy" about the idea of Emily becoming a woman. That evening, the boys feast on the lobsters, crabs, and shrimp Mr. Peggotty brought David.
David and Emily are approximately the same age, but where David seemed flattered by the suggestion that he is growing up, he reacts with discomfort to the idea that Emily is as well. On some level, this might simply be a reflection of his old wish to remain a child with her forever. In light of the novel's later events, however, it also perhaps points to David's (and the era's) discomfort with adult female sexuality. Emily is the most flirtatious of the novel's female characters, and she ultimately has an affair out of wedlock. David's anxiety about her becoming a woman possibly hints at her sexual "looseness."
The rest of the term passes without incident, leaving David only with a "jumble" of impressions of daily life. As the end of the term approaches, David begins to look forward to going home (though he fears he may not be allowed back). In the end, however, David winds up on a coach returning home by way of Yarmouth.
Murdstone's presence clearly hasn't entirely wiped out David's memories of home as a happy place. It's no longer a place he can count on for refuge, however, and therefore in some sense it is no longer home at all.