I like the Testnet idea but I would love for them to walk away having actual sats. Imagine they are in college 2-3 years from now and they can say they got their first wallet in CS class and even had it funded 
Testnet is great to learn to use the actual tools related to Bitcoin transactions, and for free (you can get easily enough coins for tests from testnet faucets). It may still be useful for you, but I can understand the idea of "earning" actual money too.
Just mining pools have certain (big) minimum amounts for withdrawal and you (and the students) may get disappointed big time...
Well, do some tests and you'll see for yourself. Maybe you'll have somewhat bigger chance with Dogecoin. I really hope you will...
3) Software wallets are cool but hardware wallets cost money so that would be out
SPV wallets are not hardware wallets. SPV wallets are "simple payment verification" wallets that don't require the download of the whole blockchain.
Hardware wallets are by far unnecessary for the scope of your experiment and indeed you can rule them out.
4) Paper wallets are outdated but are tangible and a great way to help them make the connection between pub/priv key...I actually plan to share with them a private key of a wallet that I will fund my self with $20 or so and have them race to see who can get it first
OK, point taken. But please consider teaching them also about HD wallets, seeds and change addresses
I really doubt that some scammer/criminal will be patiently waiting for those people to post a picture holding their private keys,in order to rob the satoshis,that are sitting in their wallets.What's the point of robbing a few satoshis?It doesn't make sense. 
You'd be surprised. However, maybe you can find/print the paper wallets in a way they can be folded in 2 or 3 sides and the private key goes inside, hence the photo will only reveal addresses.