I would say do these upgrades/updates, in this order:
(1) Clean install of the O/S
(2) Cheap GPU (as others have stated - 5450-class)
(3) SSD or SSD + cheap copy of Win7 (student or discount copy through work maybe?)
First item is free, second is maybe $50, and the third is between $100-150 or so. The existing CPU and RAM are probably fine for what they are doing.
Don't underestimate the ability of a half-decent GPU. When I built my sister's computer, for much of the same functionality + kids stuff, she commented that she could get and install any game and it ran awesome. As we all know, most people just buy software and then can get dissapointed when Sims3, for example, doesn't work on their $300 Walmart machine.