I know of some friends planning to make a fan-made film of an existing franchise, but am I right in telling them that it is illegal? Is there any way in which they can do it legally?

For something like a school project, it may be harmless but for making profit from it will bring legal disputes between you and Disney knowing how protective they are on copyrighted stuff they have.

no

but it depends really

What if it were for non-profit, but was shown publicly? Like, these guys want to make a continuation of an existing Disney film franchise and upload it to YouTube or somewhere on the internet. However, they don't plan on selling it, charging people to see it or making a single penny on it. It is just for fun and the enjoyment of fans of the series. Is it still illegal?