K.D.
I think you should give it back and just explain what happened. I loaned things to my friends (I did explain that I wanted it back because I knew we'd have another child) but I understood that by loaning it, I was taking the chance it could be broken/ruined/stained. In fact, one of my loans was totally destroyed in the washer. I just accepted it as part of the process of loaning. If she's terribly upset, you may want to offer to buy a replacement set. However, I think an explanation and apology will go along way.