I can imagine its frustrating to not get the picture you wanted, and that your children didn't seem to grasp why this was so important. I would say, looking to the future, that you would get most benefit from a proper and full conversation with your son and DIL. They should understand why your DH is upset and what they could have done differently to avoid it. Equally you need to understand why they didn't wear the right clothing - I can't imagine that blatant contrariness came into it at all, and I suspect it is due to a misunderstanding in what was expected.
Whatever the outcome, limiting the collegiate future of your grandchildren because your children didn't wear the right clothes in a picture seems like a spectacularly self defeating action. Not to mention somewhat controlling.
Had you never planned for that money to go to them, then reallocating is absolutely appropriate. However, if it was a set plan, then this is a punishment, and I really do not agree that you should be punishing grown (married) adults. If you want an adult relationship, then you need to treat them like adults.
An example of this is the suggestion of displaying an unflattering photo of your DIL - it is unkind and unnecessary; added to this it doesn't achieve anything.
Correct me if I am wrong but there seems to be something unsaid regarding your DIL, the undertone being that you and DH do not like her. From what I read, both your son and his wife did not adhere to the dress code, yet your son's choice of cut shorts has only been mentioned once in the OP but your DIL has received quite the dragging. From her crop tops, to her "pokey" belly and spandex dresses, it just feels to me like it's more than just about what she wore. Added to this, DS got a request to change his shirt, DIL did not,which likely implied to her that, at the time, her outfit was acceptable.
There have been a number of replies also stating that your having paid for their trip means that they should align to whatever is demanded. I would disagree with this line of thought, as any expectations of behaviour should absolutely be confirmed up front, to allow a decision as to whether or not the price is bearable. When the price is obscured, or presented as being negotiable (as in this case - they should wear the clothes you bought) there should be no surprise that there were competing outcomes. I would also say that a gift should have no hidden strings. If the price was to wear a dress ad stand for a picture, make that unmissable when inviting them so that there is no confusion as to what you expect.
It seems to me for your DS and DIL this was just a nice family picture, which they complied with; whereas for you it was a specific sort of picture, complete with outfits and poses.