As to the why, I suspect that the coaches were disappointed in his progress and wanted light a fire under him. It also tells him to make sure that he’s on track to graduate in 4 years because a 5th year doesn’t look good at that moment.
Basically the only thing Beilien did was tell Donnal that he is being classified as a Junior and not a sophomore. There is no paper work for Beilien to fill out, this is just more about a timeline of when the coaches and the player (Donnal) can expect being on Scholarship at Michigan. This is nothing official saying he can’t come back after next year. Donnal still has 2 years of Eligibility left no matter what. What Beilein probably did was try to light a fire in Donnal by basically saying you aren’t guaranteed a 5th year with us. Unless things change (which they have) you are going to be done at U of M after 2017. I’m completely fine with him doing this. I’m not sure if it had any difference in his play or not, but I’m sure it hasn’t hurt.