Everything you have answered says this person is just breeding their family pets. I'm sorry you had a bad experience with your GSD, but although the Mal breeder might be better and might care a little more, she's still a BYB. She doesn't health certify, I'm guessing she doesn't show, and probably doesn't do any kind of mushing or obedience titling.
The weirdest thing is that she wants her own puppy back into her lines...how many dogs does she have? What dam would she use that isn't related to your current puppy? Being as young as he is, she should still have the dam he came out of. So why would she need your pup?
Here's the funny thing...you said, "a good breeder to me is one who breeds the healthiest puppies possible." Without OFA certification, she doesn't do this. There is no way to know the health of a puppy/dog in the future, but this is one of those tests that at least helps you try to make the best decision based on hips. Sorry to bring this up, but you have a very young dog. You have no idea what kind of issues will come up in the future, you also have no idea how healthy his hips are at the moment since the parents weren't OFA and neither has he.