You can edit on any Mac currently on sale by Apple but some of them are better suited for it than others. And, given the choice, I don't see why you would choose an inferior machine for the task at hand.
Even the single 1.25ghz PM G4 would be better than the 17" iMac and it would cost about the same. Edu price for a stock single proc 1.25ghz PM w/superdrive is $1379.
Add in a good 17" LCD for $430.
512megs of RAM for crucial: $79
250gig Western Digital HDD from newegg: $211
2.1 speakers from newegg: $40
FCP 4: 499
MS Office: 149
Photoshop Elemets: $99
Total: $2886
For $46 more she gets a superior system that can grow w/her if she falls in love w/editing. If she gets the iMac and falls in love w/editing she's probably want to shell out for a tower (I know I would). Even if she doesn't like editing she still ends up w/a better machine than the iMac. The dual 1.25ghz would still be better and worth the extra $250, IMO. But if she had a hard budget of $2900 then the single proc PM would be the way to go.
Heck, to save a few $$$ she could buy a 15" LCD or even get away w/a 17" CRT. A good 17" CRT can be had for around $130. A good 19" for around $160. Although I think a 19" would be too big for the desks that come standard in dorm rooms (although she could bring her own desk/table). If she found she need more desktop space she could just add another monitor down the road.
I don't know why you keep bringing up the size factor. Yes dorm rooms are small but it's common to see microwaves, mini-fridges, and complete home entertainment systems w/a good sized TV so I don't think it will be hard to find room for a G4 tower.
OfflineRT should only be used if you have to use it. It takes time to on-line a project and Media Management in FCP 4 is better than in 3 but it's still a weak point w/FCP. Talking about going from OfflineRT to onlining only the used footage usually starts giving people sweaty palms. And, it's only a viable option if you have perfect, or dang near perfect, timecode. And from my experience keeping unbroken TC w/MiniDV is easier said than done (especially when it comes to students and newbies). And people only mentioned laptops if editing on the road was required.
Any uncompressed media, be it HD or SD, would bennifet greatly from a more powerful machine. But film really doesn't require it if your final product will be on film. You would just xfer the film to DV, cut from the DV masters, then kick out a cut list to send to the negative cutter to cut the actual film.
Again, you can edit on any machine in Apples line up, but given the choice why would you chose an inferoir machine for this specific task? If I had to run a mile in my flip-flops I could, but given the choice I'd never chose my flip-flops over my cross-trainers or my running shoes.
Well, I'm sure we've all ranted and raved so much that neither wowoah nor the girl that is looking for advice will ever come back to this thread.

But if either one of them does it would be great to learn more about the girl and her situation so we can give better advice instead of assuming XYZ and, based on those assumptions, refering ABC.
Lethal