Herding and nipping

[gangwa]

Hi - we rescued a 3-yr old Austrailian Cattle Dog mix 5 weeks ago. She is a very sweet dog, but we have had issues with her nipping kids, particularly small boys. She has never broken the skin, but leaves welts. The last boy she got right by the eye. She also got my 5-yr old daughter. We are taking her to obedience class (it is clear someone had already worked with her). We've been discussing her nipping with the trainer (who also works with the rescue group) and her last suggestion/recommendation was that perhaps we should return her to the rescue group because we most likely won't be able to train this innate behavior out of her. I'll note that she is still adjusting to our home and we are still adjusting to her.

Another new behavior (herding?) is that in the last week, she has been going after the cats. She has not had the opportunity to hurt them, so I'm not sure if she actually would, but she now has a definite stance/stare and is ready to pounce on them even though for the first 4 weeks she was just curious about them or largely ignored them.

I know that we could restrict her more around people to prevent more nipping, but with 3 kids, this isn't always as easy as it sounds, especially when she ends up nipping one of THEM. My biggest concern is that as she adjusts to us and is becoming more comfortable, her behavior has seemed to slowly escalate, particularly with the cats. I'm not sure what to do and was blown away by the suggestion of returning her. I'm not of the mind that you give up on an animal, but I also don't want to see her bite someone again, especially if the next time she draws blood, or having her hurt one of my cats. Help!