D is ok. The pronoun they is unambigously referring to "young men and women" because the phrase "when they were children" can logically apply ONLY to "young men and women" and NOT to effects. It is an absurd thought to believe "effects" could ever be children and hence the ambiguity argument does not hold.
I would like to point you to a website that might help in this very fundamental matter - http://www.methodist.edu/english/dd_pref.htm
I found this site quite helpful
1. The Wallerstein study indicates that even after a decade young men and women still experience some of the effects of a divorce occurring when a child.
(A) occurring when a child
(B) occurring when children
(C) that occurred when a child
(D) that occurred when they were children
(E) that has occurred as each was a child
How can I correct (A) . Would "occurring during childhood"
What is the part of speech of occurring?
Also the OA is D, but doesn't they refer to to effects and it means "effects were children"