Try out the instrument or have someone who can, play it to see if it's playable from the start. If it seems playable and could be good as a starter instrument:
1) Level with the parents and let them know that it is playable and would work for the time being (if you're willing to allow it). But make them aware of the fact that if the materials it's made of are substandard, it may or may not stand the test of time. If it does last a long time, great for everyone. But they need to be made aware of the fact that if something on it breaks, a music repair shop may or may not even work on it because they do not want to take the risk that their repairs might not hold up. Also, I sometimes found that ISOs that came out of China or Pakistan couldn't be repaired because at times their parts didn't have the same specs that other mainstream instrument brands had. Basically, they need to be made aware of the fact that the instrument might need to be treated as a disposable one if something on it breaks and if it can't be repaired.
2) From the start make the parent and student aware of the fact that if the instrument works out for the first year or so that eventually they'll likely have to start thinking about a step up instrument if they stick with band. Make them aware that even if the instrument works ok as a beginner instrument, as the student musician advances their beginner instrument is likely to hold them back musically at some point. Let them know that this is a normal thing that does happen with a lot of instrumentalists as like those of us who played our main instrument for many years, most of us moved up to better quality instruments the further along we got as musicians.
If the instrument does NOT play well from the start, tell them. Level with them and don't allow the student to even try playing it in your program. Either you or someone else who is qualified should try out the instrument if they already have it or have someone qualified try it out before they buy it if possible and give their honest evaluation of it's quality or lack there of.
The last thing a beginning musician needs is to be struggling on an instrument due to the instrument being the problem. That's a sure fired way to lose that student fairly quickly.
So back to your question, if that's all they can afford to get? It needs to be your call. You're the expert in this field. Like I said, you need to handle each situation individually because there are exceptions to the rule to where an ISO might work out for a while, but you need to be the one to make that determination. Everyone wants the students to be successful and you need to use your expertise and judgement in this area to make sure that the student has the equipment that will allow them to have the chance to be successful on their instrument.
So the answer to your question is: Sometimes let them play it, sometimes no. Again, it really needs to be your call.