Learning factories (LFs) have become an integral element of engineering education, especially when it comes to making new and on-trend subjects tangible. This also includes the abstract matters of sustainability and circular economy (CE), which are influenced by the design of products and production, and therefore closely linked to engineering expertise. This article presents how a new learning module was used to implement CE principles within a specific LF to foster sustainable practices and education. As a starting point, engineering students were familiarized with fundamental knowledge of CE. Following this, they were tasked with developing their own concepts for a disassembly line that reprocesses returned product components in the most ecological and economic way. These student-generated designs were discussed, evaluated, and have proven to be basically operable and effective. By integrating theoretical inputs with direct applications, this initiative not only enhances students’ understanding of CE, but also enables them to implement it in actual operational practice. Additionally, our research is a first step towards the institutionalization of CE practices within a realistic learning environment. The findings and recommendations contribute to the broader discourse on education for sustainability and the role of LFs in promoting environmentally conscious industrial processes.