Recommendation letters for REU from grad student
I am the project director for an NSF-funded REU program, so I will offer my thoughts on how the faculty reading applications for my program would respond.

Overall, we will not take letters from graduate students very seriously when considering students for admission.  The basic problem is that few graduate students have the perspective to judge an undergraduate's potential to do research.  When I look back to my own time in graduate school, I know that I would not have done a particularly good job evaluating undergraduates' relevant skills.

While a letter from a graduate student would be essentially worthless when a student is applying to graduate school, an REU program is a more relaxed and lower stakes admission process.  So getting a letter from a graduate student would not necessarily doom an application.  If I received such a letter, I would write back promptly to the applicant asking for another letter from a faculty member.  If we did not receive a replacement letter from a professor, we would not rule the application out automatically, but it would have to be very strong otherwise to make the cut (and students who are very strong applicants would often have little trouble getting a good faculty letter to begin with).

Other programs may be more willing to accept at least one letter from a graduate student, so if you feel that you have adequately warned the student about the risks in having you as a recommender, you may want to go ahead and write the letter.  However, you should definitely look at the admission requirements for the specific REU programs; if they specifically ask for faculty letters, I would suggest that you decline to write.