Paul never says that Sarah’s reasoning is circular. Paul actually accepts Sarah's definition of what counts as volunteering, but he introduces a point that her argument does not consider.

Paul never says that Sarah's definition of volunteering is too narrow. He actually seems to accept her definition, but points out that even if, according to her definition, being required to do community service doesn't count as volunteering, some students who have been required to do this may willingly do something similar again down the line, which would count as volunteering according to Sarah. So Paul points out that these students' future activities are included in Sarah's definition of volunteering. But he doesn't say that Sarah's definition has excluded these activities, or needs to include more specific activities—like working for a nonprofit, say, instead of just community service.

This is accurate. Sarah assumes that if an activity cannot be said to instill a habit of volunteering in a person right now, that activity will never result in a habit of volunteering: i.e., she assumes that forcing someone to volunteer will not cause them to actually volunteer of their own accord.

Paul counters this by bringing up a new point, about cases where students afterwards volunteer on their own because they enjoyed doing it as a requirement.

Paul never questions or even mentions Sarah’s motives.

Paul brings up a point that Sarah doesn't consider, but he never mentions a policy that she doesn't consider. The point he brings up about students volunteering later on is a consequence of the same policy Sarah is criticizing.