Should you tell grad students to apply for grants you know they won't get?
If what you say about your students' writing skills and their chances of getting a major grant is accurate, I would say that it's a complete waste of everyone's time - theirs, yours, and the reviewers - to have them write such major grant proposals. Forget about using such proposal writing as a vehicle to improve their writing skills. The experience won't benefit them if their current writing skills are really as bad as you say they are. Instead, have them focus on the smaller-ticket grants. If any of them show evidence of more promise and growth after such experiences, then you can direct these more promising students towards targets that are higher up on the grant ladder.