Sentence 1 is correct because the two actions "his parents died" and "he was still at school" occurred at the same time, so you can use the Past Simple for both sentences.
Sentence 2 is also possible. This is because the action "his parents had died" happened before "she said", and so "his parents had died" is in the Past Perfect.
Sentence 3 is not correct. "While he was still at school" is a time phrase to indicate a specific time period. We often use verbs in the Past Simple (or the Past Continuous) for phrases like this. Here are some more examples:
"While I was living in Spain.."
"When I was a child.."
"While I was studying at university"
"When I was a teacher.."
If you have any doubts, please let me know.
Jamie (www.italki.com/jamie.teacher)