Hello Fleet,
I'm new to these boards, and, as it happens - new to teaching aswell. I have around 10 students who range from complete beginners to ABRSM Grade 6 - 7.
This is a question I'm accutely aware of as one of my more enthusiastic students is always bringing along pieces that he wants to play that range from Debussy through Chopin to Scriabin (!). The most important thing, I believe, is to make sure that I maintain this boy's enthusiasm. I would feel ashamed if I made the young chap feel like he no longer looked forward to sitting down at the piano.
Anyway, to answer your question, I tend to break pieces down into the technically challenging and the musically challenging. This is, of course, a terrible generalisation, but it has a certain amount of truth. Under no circumstances would I teach a youngster a Chopin Etude or, say, a Scriabin sonata. I don't care if they can just about 'get it under their fingers', it would be slow, grinding stuff, would reduce keyboard practice to a building site and very possibly damage their fingers or wrist. I don't actually think this is too bad as a teacher can almost invariably find a simpler piece by the very same composer which will feed their appetite.
Musically challenging pieces are a different kettle of fish. The very same student loves, as most people do, Debussy's 'Claire de Lune'. It's a piece that I believe has been taught at Grade 7 level. I actually disagree with this! It features all the same techniques that we see in Debussy's more advanced piano repetoire (say his Ballade), needs to be played at a good rate to bring out the melodic line and requires a refined musical touch.
There's a very good chance he will butcher it! But the thing is, I don't think that matters. If we explore the piece, he will learn all about Debussy's approach to the keyboard, and even if it doesn't sound quite right, he will start to accumulate the experience that will hopefully turn him from someone who plays an instrument into a musician.
A long winded answer, but I hope it helps.