In trying to teach kids what is stealing and what is "using source material" in doing your own artwork, I usually stick to the idea that the composition of the work is the most original part. Most artists I know use images that come from the work of others. For example, if I want to paint a tiger, I'm a bit at a loss for original drawings, since there are every few in New England, and those are in zoos. I would use published images- lots of them- to get an idea of the animal and them work up a picture that is based on what I see. It would not be a copy of somebody else's picture, but it would derive from their work.
There are rules in art, just as in anything else, but this isn't about rules. If you want to let her use your art to make hers, go for it. If she doesn't admit to the fact that the composition is not her own, however, she may be a great technician, but she isn't a very ethical artist. If she admits to the collaboration, as seems the case since she is asking permission to paint from your work, she may be a bit lazy, but not really out of line. Charge her what you would for exclusive rights to the image, or perhaps tell her that she may indeed use your image, but that you would like to have the photo displayed next to the painting. People would then see both the quality of the original image that inspired her and the beauty of her interpretation.