As you mention, "l'un l'autre" is fine ; it actually is the first I thought of when reading the question. The verb remains in its pronominal form ("s'aident"), though :
Les élèves s'aident toujours l'un l'autre avec leurs devoirs.
The students to-one-another-help always each other with their homework.
(~ translating word by word)
The other way you mention doesn't really work in my opinion, in the sense that you don't translate explicitely "each other", so it ends up sounding like a general truth:
Les élèves s'aident toujours avec les devoirs.
Students always help one another with the homework.
I can thing of yet another way to translate "each other" : mutuellement.
The students always help each other with the homework.
Les élèves s'aident toujours mutuellement pour leurs devoirs.
Also, entre eux (litteraly : "among themselves") translates "each other", ans is used exactly the same as "mutuellement". I'd say this would be the most common way of translating your sentence.
The students always help each other with the homework.
Les élèves s'aident toujours entre eux pour leurs devoirs.