In its decision, the state's rights division said retaining the ban in place "creates an environment that is objectively and subjectively hostile, intimidating or offensive," CNN reported Monday.
Coy was born a boy but identifies as a girl, the report said.
"Schools should not discriminate against their students, and we are thrilled that Coy can return to school and put this behind her," Kathryn Mathis, Coy's mother, said in a statement. "All we ever wanted was for Coy's school to treat her the same as other little girls. We are extremely happy that she now will be treated equally.
"This ruling sends a loud and clear message that transgender students may not be targeted for discrimination and that they must be treated equally in school," said Michael Silverman, Transgender Legal Defense & Education Fund executive director. "It is a victory for Coy and a triumph for fairness."
The Fountain-Fort Carson School District 8 told the child's parents in December the first-grader couldn't use the girls' bathroom after returning from holiday break, The Denver Post said. The family filed a civil rights complaint in February.
School policies concerning transgender students vary state to state, CNN said.
In New York, for example, the law says students can't be discriminated against on the basis on gender identity.
However, a Maine court ruled in November a school district did not violate a transgender student's rights when she was told she couldn't use the girls' bathroom.
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