With AI, they fail later (during the exams), where as without using AI previously, they'd fail early and either course-correct, or drop out early (and suffer less of the consequences).

Not sure what the solution is - there's no possibility of stopping students using AI to complete their homework/assignments etc. But let me flip the question - do they need to be stopped? Why not let them fail at the exam? As long as the exam acts as a filter, their usage of AI to "cheat" their learning is inconsequential to anyone but themselves.