I fully concur that a child wants to play something that "sounds like something" and if Old Joe Clark sounds pretty close to the original using the D7 they feel like they have achieved an "actual" song.
My students often play a single fingered G chord, or a C9 instead of C so they can achieve playing a "whole song all the way through" - and folk songs have always evolved and changed, (I think you may be hard pressed to find original copyright owners, with over 90 verses written) - the 7 year old guitar student isn't going to get up on the Grand Ol' Opry stage and play the song using a D7 anytime soon - so let them enjoy, develop and nurture that passion for music - they'll learn about modes, and barre chords in plenty of time!
Nope, teach it like it is by: Karl
There are scores, probably hundreds of songs that are equally as entertaining which wouldn't require a beginner to compromise the chord structure. Why not choose one that actually features G and D7?
Guitar tabs for beginners "Pizza Please" is really just Hot Cross Buns in disguise. This all-on-one-string free guitar sheetmusic is perfect for new beginners!
Made-easy notes for beginner pianists, "Yo Ho Ho!" is a fun song with a strong melody. With versions for three skill levels, you'll find one for your student!