We will understand this by first answering a different question. Korach was a rebel. He was a sinner who never did Teshuvah. How can we call a portion of the Torah by his name? King Solomon, the wisest of all men, teaches us that "...the name of the wicked shall rot." This is undoubtedly so, considering that we call the entire portion, with all it entails, by his name. This is a question that would also bother a beginning student.
Granted, the same is true regarding the Torah portion of Balak. Balak was the king of Midian, an evil person who wanted to curse the Jewish people. Nevertheless, a Torah portion is called by his name as well. Indeed, this fact does not answer our question; it merely expands it. Additionally, even a child just beginning to study Chumash understands that a Jew who becomes wicked is even worse than a gentile who becomes evil. Hence, in our case, the question certainly applies!
We can understand this based on hidden, more profound aspects of the Torah. From this perspective, Korach wanted to achieve something positive. He wanted to be a Kohen. We see this from Moshe saying to Korach's band, "... and now you seek the Kehunah as well!" Not only did he seek Kehunah, but he wanted to become a Kohen Gadol! In other words, he wanted to be on a higher, more exalted level than he was. He wished to attain the status of a High Priest. The Torah teaches us that the Kohen Gadol was "... separated ... to be most holy." Korach wanted to be separate from all worldly matters.
The desire to reach a higher level was undoubtedly a great thing. Moshe Rabbeinu himself said that he also wanted to be a Kohen Gadol. Indeed, that is what he wanted. But in actuality, there can only be one High Priest.
This can be more clearly understood based on what the Alter Rebbe writes in this week's Parshah in Likkutei Torah. He notes that "the root of Korach's rebellion ... is that in the time of the ultimate redemption, the Levites will be Kohanim. Korach wanted to institute this conduct in the present. His mistake was that such a thing is only possible once the world has reached complete perfection." This means that Korach wished for our world now to be on the same level as it will be with the coming of Moshiach.
All of this is alluded to in Rashi's comments here. Even before explaining Peshat, he tells us that the Midrash expounds on this. The Midrash brings out the inner meaning of what took place. It demonstrates that it was all indeed good. Rashi does not merely say that the Midrash explains it well, but beautifully. This story does not seem to be at all positive. However, the Midrash expounds upon it and reveals that it is exceptional.
Furthermore, Rashi tells us that this Midrash is that of Rabbi Tanchumah. Tanchumah is related to the Hebrew word "Nechomoh," meaning consolation. The story seems negative, but the Midrash consoles us by bringing out its positive aspects.
