So here's my theory that kind of blends the fiction twist with SHSL talents/the SHSL hunt existing.

It's clear that not all of these students are down-on-their-luck social outcasts that only find happiness in fiction, like the Makoto story suggests. Their school uniforms and, if their previous schools are actually their normie ones, suggest some of them live a life of wealth or at least comfort, and some are quite intelligent. I really doubt that all of them are suicidal outcasts who can't measure up to society's standards and therefore rely on fiction for happiness from that, and even the audition videos we do see only implies that for Saihara. I think that they were all truly kidnapped and are not participating of their free will and it's because of the SHSL hunt.

SHSL students do exist and the gifted system is an actual thing. But like our world, the talents are not all that fantastical. Sure, the students are exceptionally talented in their field of study, but they are in such a way that's fairly "mundane". We hear all the time about cello prodigies, math geniuses and Olympic level athletes that really live fairly normal high school lives besides their particular talent. No crazy, wacky backstories involving superhuman feats or extraordinary circumstances. Talents like entomologist, folklorist, pianist, akido master, magician, etc etc are not impossible to have on in "normal" universe. They just exist basically as is- for example, Gonta probably doesn't live in the woods with dinosaur people and instead is just very well known for his talent and work with insects, Tenko is an excellent athlete and perhaps Olympic level but didn't create a sport on her own nor moonlights as a superhero, and Kaede is a well known piano player in Japan instead of someone who tours worldwide playing for royalty. Think of a SHSL title as an esteemed scholarship in this universe rather than what it is in the HPA universe (aka a mark that they are the absolute best and often exceed human ability).

However, this still is a society that values talent and achievement above all else. These students are awarded privileges in society that put them above those without talent and there is a large social disparity between these two groups. This creates extreme amounts of social tension and the riots we see in the remembering flashlight about the meteors (the context is repurposed for Tsumugi's purposes) as well as Saihara's memory of the SHSL hunt. People attack the privileged out of frustration and the SHSL hunt begins during this period of unrest. Fearing for their safety, talented students shed their identities and erase their memories of being talented in the first place. So the students in the prologue are in hiding, and it's easier to be in hiding because their talents aren't really all that fantastical and for the most part, they're not all that well known by face. There's no singular Hope's Peak to make these students famous, so they're less recognizable and just going into what basically amounts to witness protection program would be more effective than it would for HPA students. However, the danger is still there, as they are somewhat public figures.

The Dangan Ronpa series are fiction within the V3 universe with the premise of "what if our system of awarding privileges was condensed to a single school and all the students were WACKY". Maybe it's even satirical- look at how ridiculous it is to value talent this much and what it can do to the planet. Still, it's as popular as Tsumugi describes it, and there is a demand for the show. There has been a reality show running for decades with killing games, crazy talents and characters. However, up until around V1, the games were really fiction. Like the 50 or so folders in Saihara's talent room suggest, they didn't involve actual deaths and were perhaps VR, entirely staged or just "acted out". When the SHSL hunt began, the show was hijacked by TDR in order to serve as anti-gifted system propaganda and entertainment for the underprivileged and untalented masses and started actually executing real SHSL students. This is the real SHSL hunt- the rounding up of SHSL students to be made into fictional characters and executed for the entertainment of a frustrated society. I think it's very likely that there's a lot of social unrest going on in the background of V3 that's causing this.

Additionally, I really doubt the veracity of the audition videos. They're either entirely faked or the students contained within them are being forced to say what they're saying in order to make it seem like this isn't a mass slaughter of teenagers and instead something they want.

Back to the students themselves- The student's backstories are made for entertainment and are largely false. The basic talent (physical ability, cognitive level, analytical/critical thinking ability, etc etc) is there, but in order to make their deaths much more entertaining for the viewers, their backstories have been embellished with DR-style details and scenarios. This explains why there isn't massive cognitive dissonance in characters like Maki and Hoshi, who's physical ability cannot be explained by mere remembering lights, but their in-game backstory does not make logical sense with the prologue (how did Hoshi get out of prison? How did they capture an assassin? How did the prime minister get captured?). Tsumugi, as a lover of anime, manga and light novel associated troupes, crafted their backstory not only to serve as entertainment but also to make the entire thing seem unbelievable for the reveal that their fictional. Cast doubt on some of their backstory and the entire thing seems false, and as the mastermind she's aiming to make them despair for the purposes of the show and it's entertainment quality.

The only students this theory doesn't work well with is Maki (an assassin is probably not something a government would want to award and recognize) and Ouma (who's talent is hard to "normalize" aka make mundane, unless DICE is actually real in this case and he's just a well known troublemaker/prankster).