For more on track changes, see here:
http://shaunakelly.com/word/trackchanges/HowTrackChangesWorks.html
As Aelfgifu said, version makes a difference. I tried doing this as a
teacher a couple of times and decided I didn't like it. One, the track
changes method encouraged me to rewrite instead of flag problems, and if
students can just "accept" the change, then they aren't learning how to fix
it. Two, I had to spend too much time telling students how to use it, and
making sure they saw all my comments. Are you sure all your students
actually have Word, also? They can send you documents you can open even if
they have WordPerfect.
I have been returned papers where the teachers just typed their comments in
all caps right into the text, and I think that works quite well, and have
done it myself. I have also used the Highlight function (should be on the
formatting toolbar) to highlight typos, spelling errors, etc.