If students upload pictures and there is no error message and no picture either, and you are on Unix/Linix, check the permissions on you moodle data directory. chmod 777 fixed it for me.
Seems like 777 is more liberal than it needs to be. Would be nice for windows-types like me if the installation instructions stated the specific chmod when talking about setting permissions. I'm sure the instructions say exactly what to set it to. I just didn't understand it.