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I think the paper on the wall would be more time consuming than simply using paint. It's a neat idea and if you want to stick to it I would do the bottom 1/3 or bottom 1/2 and then put the frames pictures of the children above that which would be on a neutral paint-color wall. Are you able to take down the paneling? We use to have that in our first house and it just screams "outdated".
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