i know buffy started doing better in school later on, but she was never the star student.

Buffy was smart too, but it was mentioned a few times that Oz was very clever and only didn't do well because he didn't really bother with school.

Yeah, Oz just didn't care, it had nothing to do with him not being smart.

Between Buffy or Oz

Oz was considered gifted, like Willow. He just didn't care.

The plans she came up with were just plain brilliant, and she proved that if she put her mind to it she could get really good scores, it's just a shame that being a slayer prevented her from achieving her potential.

She may not have been school smart, but she had wisdom and knowledge about other important things, like slaying and ways to kill a demon, and how to use anything as a weapon.

Basically, Oz only stayed back a year because the writers wanted him to still be there in season 3. Maybe they hadn't considered the idea of a Sunnydale college yet, or maybe they didn't want to foreshadow the idea of Willow choosing that college to stay with Buffy by having Oz having already done the same to stay with Willow and the rest of the Scoobies. Back in season 2 he was smart and successful enough academically to have been selected by the same Career Week intelligence scout as Willow.