Unfortunately, there is no way to do shared document editing in the current installation of Moodle.
You would need to download the students’ documents to your own computer. Make and track the changes. Save the file on your computer with a name that will help you locate it again (e.g., Paper2_FEEDBACK_StudentLastName-StudentFirstName.docx, StudentLastName-Paper2_FEEDBACK, etc.). Then go into the assignment activity and upload the file as a feedback file as you are grading.
For the instructions on submitting a file as/with feedback, explore this FAQ: