Bump, I'm having the same problem. I also have SKSE, script dragon, and several other .esp mods (pretty much everything from the STEP guide). I would also appreciate a solution to this if someone has it.
The game describes Alteration as "the manipulation of the world around you" and Illusion as more of manipulating your target's mind. If you're transforming someone, that is definitely outside of the target's mind, so it seems to me that Alteration would be the clear choice as far as the school goes.