Grant proposals vs. journal articles
Although grant proposals can be obtained by others, and plagiarism in a grant proposal is as serious a matter as plagiarism in a journal article, a grant proposal is not a publication and so the inclusion in the proposal of material from the paper that the graduate student wishes to publish would not count as a prior publication, so would not prevent the student's later publication.
Of course, the professor should give credit to the student, if only by citing the student's unplublished report in the proposal bibliography. It is unfortunate that some professors had minimal education/ mentoring in research ethics and provide poor models for their students.
Crediting Trainees for Writing Grant Proposals posted by CarolineWhitbeck
Grant proposals vs. journal articles posted by Reflective1
Crediting work posted by JohnAhearne
Credit in a proposal posted by Michael Loui