Just found out I can get Windows 8 free through a program at my university so I'll probably give it a try.

Any move to a new OS will break some games, so the choice depends on which games are important to you. I'd say that currently Windows 7 is the most compatible, but not all old games are compatible with it. For maximum compatibility you could go for a dual-boot system, and then I'd say that getting Windows 8 would be fine (unless you really hate the way it looks). Just switch to XP when you want to play something that's no longer supported. Again, it all depends on your typical usage pattern. For example if you're really into old non-GOG games which aren't compatible and you're playing them a lot, then an offline XP system plus a newer PC may be the way to go.

Damn, of course. Why didn't I think of that when I suggested buying a whole new PC for the new OS?

Since Windows XP is running ok on that PC already now, just install Windows 8 beside it on a different partition (or hard drive, if needed). Best of both worlds, use XP if you can't get something running ok on Windows 8/8.1. That's definitely what I would do, if I were him. Windows XP is even more compatible with old games than Windows 7, even some GOG games (e.g. Gorky 17).

Of course, if he doesn't care about backwards-compatibility with old games that much, then replace Windows XP completely with the (free) Windows 8.