At what point do you give up?

That is because his muscles haven't yet developed enough for him to allow him to carry himself properly. A strong contact isn't going to help that, which your RI should know! Before selling the horse, I would find a good instructor. I know you like this one but s/he honestly doesn't sound very knowledgeable.

It must be something about riding instructors around my area - the last 3 that I have had have all said the same thing!
 
Depends. What do you want to achieve?
Maybe have some more realistic goals? Perhaps you are expecting too much? :)
Appreciate your horse for what he is, not who you want him to be?
 
If the contact issue is the only problem then agree get another instructor! My Welsh D was at times a moron and very stiff, leaned on one side, leaned on both reins, chucked her head around, you name it, due to bad riding before I bought her. It really hasn't taken much better for me to sort this out but I have managed it due to having a good instructor. They can only lean if you let them. Sounds simple and it is simple but you need the right help.

My mare still has a long way to go in her schooling but the unpleasant head behaviour is cured.
 
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