School of light - Jody Lynn Nye

Where does your mind go when you fall asleep? To the Dreamland, where seven Sleepers dream the ever-changing landscape drawn by the myriad sleeping minds from the Waking World. Where form follows function, so a hovel today may be a castle or a cave tomorrow. Where the people battle nightmares with only the strength of their will and sanity.
Juele is the youngest and most promising new student to enter the School of Light, the legendary institution where she will learn how to master illusion, the Dreamland's highest form of art. There her mentor, Rutaro, embarks upon a project to surround the Castle of Dreams with an image of perfection in which Juele has a crucial role to play. But jealous rivals set out to pervert Rutaro's design, and what they have in mind bears no resemblance to reality. And no-one, not Rutaro, nor the king, nor even Roan, the King's Investigator, seems to notice that the Dreamland is plunging into chaos. Juele must find the reality within the fantasy with the only skill she has at hand: illusion.