Understandably you are worried about your daughter and grandson, but your initial reaction to her proposal is one of dismay, and I think you should follow your instinct.
Your daughter is unhappy, but she is not destitute, or undergoing a life-changing trauma. It sounds as though she wants a break, at your expense, financially and emotionally; it sounds as though it would disrupt your pleasant, secure and hard-won life which you have created by your own efforts. Don't feel guilty about it; why should you?
You need to ask some hard questions.
Is she able to get a better job and earn more money?
Does the father of her child contribute financially?
How much would you have to do, and how much would it cost, to make the two attic rooms into a home for them?
Would you be able to share a kitchen happily, for two years?
How much does she realistically expect to save, and how much would she contribute to your household expenses?
Would you seriously be able to demand evidence of her savings account as a condition of her living there?
And finally, what about your partner; what is his position in all this?
Is there any way you could help her financially to move to somewhere better, without having to disrupt your life?