You could indeed get a small hard drive for them, and dual boot Windows XP. This will ensure that everything is kept completely separate.
You could also set them up with a separate user account on Windows XP, and modify their permissions. In order for them not to be able to access your documents, you would have to set your folders to be private.
However, this may not be what you want still, as they may not be able to install everything they want on there, and will need an administrator account. Plus everything they install and put on will take up your resources.
A new hard drive would not be very expensive, and it would mean they could do whatever they wanted on their hard drive without affecting anything of yours.
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