First of all, I think punishing a child for getting 1 C and the rest higher is going WAY overboard. Those grades are not that bad. Sure, bio-dad wants them higher but they’re not. To get worked up over this is going way overboard IMO. Expressing concern and wanting them higher, yes but punishment, and so extreme?
Second, any step-mom (or step-dad) that has to deal with a live-in step-kid on a half time or less basis gets little sympathy from me. Try dealing with a step-kid whose getting D’s and F’s, ditching school and a bad attitude FULL TIME. Those step-parents are the ones my sympathy is for! 
Third, ceyjen, you are in a damned-if-you-do, damned-if-you-don’t situation. If you interfere, you are a evil, naggy step-parent. If you stand back, you are an evil-uncaring-step-parent.
You can’t win. Realize this. You will never be the ‘mom’ and the child will never consider you the ‘mom’. If you get old, alone and need help, the child (now adult) will say “She’s not my mom!” and will not help or visit. You are not family. Never will be. You will be tolerated so long as bio-dad is around. If he dies or leaves, you will be an unwelcome stranger. If the bio-dad dies, the children and relatives will be angry if you get any of the marital assets thinking it belongs to them and not you, the non-family stranger. Careful, because bio-dad may feel the same way and want to leave them his share of the marital assets instead of you in his will!
Even though the above is true, you will be expected to sacrifice your retirement, time, energy and quality of life for your step-kid. Help pay for a car, college etc. You will get no credit for this sacrifice and will look sooooo evil if you express anything but enthusiasm for your sacrifice.
Needless to say, I recommend anyone thinking of becoming a step parent, especially full-time, to think twice. If, after thinking twice, you still want to do it, think a third time.
I’m sure there are good step-parent/child relationships but, in general, they are usually not-so-good. Heck, many parent-child relationships are not-so-good! 
My advice, FWIW, is to back off. Be a positive person and put a positive spin on things but do not be dragged into the swamp.
If you are accused of being uncaring doing this then talk with your husband that you have no power in this situation. You have no mommy-authority and feel uncomfortable trying to change someone’s behavior when you have no authority. Tell him you love him but what he is asking is much and you are not comfortable with trying to discipline but have no parent authority. Not the best solution but helps your sanity.
If bio-dad and her argue and storm their separate ways, go talk with the daughter. Do not try to parent, just talk. Try to explain why you think bio-dad is acting the way he is/what his concerns are and why so she can try to understand his motivations. Take her out one-on-one and talk without trying to be a parent. Not a friend, just a concerned/interested in her adult.
Yup, I’ve been there. Not sure I’m the best model to follow but made it through a difficult time and helped mother/son get through a difficult time also.