GA Instructor pilot reported a near midair collision with a helicopter after takeoff; causing the Student Pilot Flying to arrest the climb for avoidance.

Narrative

On Date at approximately XA:50 local time I departed the Flying Cloud Municipal Airport in Eden Prairie; MN with a CFI candidate for closed traffic pattern work at the airport. We were cleared for takeoff on Runway 28R and the Controller instructed us to extend our upwind to accommodate other traffic arriving at the airport; as well as a helicopter doing closed traffic pattern work on 28R. We begin the takeoff roll and I see the helicopter ahead roughly 300 [ft.] AGL about 1;000 feet beyond the departure end and then I lose sight of them. The helicopter was instructed to also extend upwind which concerned me as I knew we would be quite a bit faster than them and would quickly close the distance between us. The helicopter was told to extend until they had downwind traffic in sight; which the traffic was just entering the downwind. The helicopter began to turn crosswind but at a very slow speed I would estimate roughly 15-20 knots. My student had to arrest our climb in order to prevent a collision with the helicopter. Tower then instructed us to make left traffic for 28L and we continued into the downwind and executed a safe landing. At no time were we given instruction to maintain visual separation with the helicopter. The improvement I am hoping this report will bring is more vigilance on behalf of the tower controllers at FCM as well as all the flight instructors and students. Even in a tower controlled environment; operational errors are present with the saturation of flight training that occurs at this airport. I would also recommend that helicopters and airplanes be separated by a wider margin due to the speeds at which they travel in the pattern as well as the difference in lengths of the pattern legs between the two categories.