Generally this term means that the people who were above it all were not participating in some action or emotion. Example: The young children were coloring pages with crayons while the teenagers were above it all. Example: The woman cried hysterically over the sudden death of her pet while her husband being above it all never shed a tear.

'Above it all' implies superiority. In this case, the students looking out the window are elevating themselves above the (presumably) innappropriate or childish behavior of the students in the classroom. Another example: The celebrity entered the hotel with her nose in the air as if she was above all the reporters and adoring fans. (She felt above them all.)