A video shared on social media appears to show the 24-year-old teacher, Samantha Cox, alone in a classroom hunched over a book in her lap while students wait outside.
Students believed the video showed Cox making lines of cocaine and alerted school administrators, officials said.
Police arrested Cox and escorted her out of Lake Central High on Wednesday.
Cox is being held on charges of possessing a controlled substance and drug paraphernalia, according to St. John police.
Dyer Police Chief David Hein said in a statement that the Dyer Police Department K-9 narcotics unit was requested to assist St. John police officers with the investigation.
"Lake Central is a safe school," said Lake Central student Michael Sanchez. "We have a lot of pride. We love our school a lot. And for something like this to happen, it's very unusual."
Another video from social media appears to show Cox being escorted from the building by officers. School administrators confirmed that police had taken action against a teacher but declined to provide further detail.
According to a statement from the school, the situation was handled with "swift and forceful action" and parents were contacted via robocall.