I often make quilts with children (my grandson, quilt classes for kids and my classroom of second graders!). I have very good luck with Crayola Fabric Crayons but we draw/color the blocks before they are sewn together. It is easier for the children to draw on one layer rather than three layers, coloring over thread and dealing with the bulk of the entire quilt can be tricky. Also, they get very sad if they make a mistake and it is already part of the quilt!!!
If you put a piece of rough paper (ie construction paper or oatmeal paper) under the fabric square while they draw it keeps it from sliding around. Have them draw right on the fabric (not make the transfer) and heat set it with your iron---be sure to put a piece of paper over the drawing so you don't mess up your iron.
Good luck and have fun!!!