Just saw the movie Donnie Darko and of course there are many unanswered questions... but how did his teacher Drew Barrymore as Karen Pomeroy know about Frank? There is a scene in which she mentions it to Donnie and as far as I know only the psychologist knew about it.
Note: This answer is based on the Director's Cut.
Karen knows about Frank because Donnie told her (and his classmates). In a scene where Donnie is reciting a self-written poem on "Poetry Day" in his English class, he talks about Frank. Once he's done, Karen asks him who Frank his, to which he replies: "a six foot tall bunny rabbit".
So, that's why she knows about Frank and whispers in Donnie's ear: "Maybe you and Frank can read this one together."
However, it's most probably more subtle than that...
If you go by the in-universe book, Roberta Sparrow's The Philosophy of Time Travel, then it seems obvious that Karen is one of the Manipulated Living. In the scene we are concerned with, she is subconsciously nudging Donnie to follow Frank — to make him realize that his visions are NOT mere hallucinations.