To reproduce the problem, be sure to test with a folder that contains subfolders and be sure to check the option "Also apply this template to all subfolders".
If you don't check that option, File Explorer will successfully set the folder type for one level. The issue is with setting the folder type for an entire folder tree. When tested that way, I can reproduce the issue on any Windows 11 computer with a reasonably current build. It's possible that this issue does not exist with very early Windows 11 builds, but the first reports on feedback hub go back about a year now.
Also, if testing the issue on removable media, be sure that the drive is mounting as type "USB", not type "Local Disk".
For drives that are type "Local disk" you should still see the issue that you cannot override the folder type for an entire folder tree. That is, File Explorer's automatic folder type discovery will keep resetting the folders back to its "discovered" (aka "sniffed") type. For example, try setting a folder tree containing images to type Documents, Music, or General items on a a fixed disk. File Explorer will happily do that on Windows 10. It won't do it on Windows 11 (at least not for ALL the subfolders).