AI writing tools like ChatGPT, QuillBot, and Grammarly have reshaped university writing workflows. Controlled studies show gains in grammatical accuracy, student engagement, and self-efficacy, but none of the intervention studies retained in this review directly measured critical thinking or other higher-order outcomes, leaving concerns about overreliance largely untested rather than resolved. Synthesising 68 references published between 2008 and 2025, including 42 empirical studies, this narrative review examines how students utilise generative AI, its influence on core learning outcomes, and necessary institutional adaptations for policy and assessment. To address these shifts, the paper synthesises empirical findings across diverse study designs and proposes a seven-dimension AI literacy framework alongside practical design principles for effectively integrating AI tools into modern writing instruction.