I don't know if this will help your students, but here goes. From the formal linguistics perspective, the intended question is constructed by starting with
Then you attach the interrogative pronoun 'who' as the subject
who play piano
So there's no place for another subject pronoun.
When you make it present tense and imperfective aspect, the verb structure becomes
be who playing piano
The subject 'who' raises to subject position and triggers agreement with 'be' to form
who is playing piano
It's possible that your students are misunderstanding 'who' as a complementizer instead of a pronoun. So in their incorrect sentence 'who is she playing the piano' the 'who' might be intended to correspond to 'whether' in
I wonder whether she is playing the piano
Theoretically, there's a wh-complementizer at the very top of the correct question structure, but it has no spoken content in English. It's similar to 'that' that can be left out here:
I think that she is playing the piano
I think she is playing the piano
Another possibility is that the students are attempting to form
Who is she that is playing the piano
and are trying to use a null complementizer instead of 'that' which isn't allowed in English here. As in, they are forming a phrase parallel to
I like the girl that is playing the piano (but not some other girl)
which you can rephrase without the 'that is'
I like the girl playing the piano (but not some other girl)
The students may also be simply misunderstanding the prompt: Are they supposed to ask a question about the girl's identity, or what she's doing?
Incidentally, questions in English are especially weird when they involve the subject, so I'm not surprised to see ESL students struggling with them. Among other weirdness, they don't trigger do-support:
*Who does be playing the piano