+2 for the refurbished section.
Unless she's a heavy gamer, then any MacBook will do. I think you can get one of the
aluminum unibody MacBooks for $899 refurbished. I prefer aluminum to plastic unibody any day. Aluminum is more durable period. And you won't be missing out on any new features since the I/O ports are the same from the plastic to aluminum MacBook.
I have about 700+ songs, 10+ movies, over 200 podcasts in iTunes, and I'm only using about 100GB of my 320GB HD. I've also got FCE and Adobe CS4 installed as well as other HD hungry apps. So I think a 160GB for a 10 year old should suffice. You can always upgrade later on by using Carbon Copy Cloner, clone the drive, upgrade drive and put the clone back in.
I would use iWork since I doubt she'll be sharing Office files with many people. It's also cheaper and more efficient to use (easier to concentrate for me). If she does share Office files quite frequently, then Office will be needed. iWork does export to Office formats, but conversion process isn't perfect. Some formatting, etc will be lost. This matters in the business world, but not so much for a 10 year old.
When I was about 8 years old or so, all my teachers were suckers for the templates I custom made myself in Word (I was a PC'er back then). I'll bet that they would fall heads over heels with the templates found in iWork.