I'd go with an audiophile, one of the $100 large diameter condensor mics, and an audiobuddy pre/di box or cheap mixer. With that setup, he could record vocals, acoustic guitar, electric guitar, and bass. That all adds up to a little under $300 in US dollars new. Might have to buy used in order to be able to afford the needed acessories:
1 or 2 rca to 1/4" cables, an xlr cable, a mic stand, and a pop filter.
$300 is tight. If he's only gonna do a few tracks per song, he could maybe skip the sound card for now. I have managed with onboard 16 bit sound and it sounded ok using the audiobuddy and a mxl 990 mic for a first time setup. You can listen to some quick and dirty examples here (the 7th, 8th, and 9th tunes):
http://www.soundclick.com/bands/1/travisthompson_music.htm
There's also a couple of things I did with a $2 pc mic straight into my onboard sound. The $2 mic is'nt reccomended though.
If you go with a dynamic mic, I'd still get a pop filter. Dynamic mics don't give as much detail as a condensor mic does though.
He will also need some free software for recording:
Audacity - free multitrack recording software
Kjaerhus Audio - free VST effects plugins
Leaf Drums - free drum sequencer
Natural Studio kit - free acoustic drum samples
ASIO4all - free generic driver which provides low latencey audio for non ASIO sound cards
I have'nt tried Audacity so you might ask around about how good it is. Leaf Drums is a little confusing to use. There are some free samplers that would probably be easier to use.
If you need any help with the software side of things, pm me and I'd be glad to help.