A certificate of B1 German is necessary for your wife to receive a residence permit as your spouse. This rule is laid out in paragraph 30 of the Residence Act:
The only possible exceptions I am aware of in this situation is if the person has a disability which prevents them from learning German.
The rules for children joining a parent are covered in paragraph 32 of the Residence Act:
I assume the applications for your wife and children have been made together and this is why the children’s permits are dependent on your wife receiving a permit. As I understand paragraph 32, you could make an application for the children according to section 3 of it. This would mean your children would apply independently of your wife. Assuming you and your wife both have custody, she would have to give her consent to the children staying with you in Germany. This could mean ultimately that your children would receive permits but your wife would be expected to leave the country. Alternatively, she may receive a Duldung due to the children.
Could you explain the issue around your son's schooling related to this? I assume he has been in Germany for at least six months? If so, he is obliged to attend school and a Duldung is sufficient identification for him.
Let us know if you have any other questions.