How do the +1/+1 tokens created when Hooded Hydra dies play during combat?
Your opponents are mostly right.
What you're missing with this scenario are: combat steps, assigning damage, and triggered abilities.
When anyone attacks with creatures, there are certain steps that are taken.  In general they are:

Before Combat
Declare Attackers
Declare Blockers
Damage

In each combat step, the action is only taken once.  In other words, there is only one &quot;At the beginning of combat&quot;.  The attacker selects all attackers at once, and then they are set. The blocker selects all blocks at once, then they are set. Damage happens all at once.
In between and before each step, players get priority and triggers happen.
So, in your scenario:

Opponent declares 3 attacking rhinos
You block with Hooded Hydra
Damage happens

You take 10 damage, hooded hydra takes 5
Hooded hydra dies, and its death trigger goes on the stack
Assuming nothing else happens, the death trigger resolves and 5 snakes are created



Go to after combat (likely second main phase)

So, because the snakes are created after you have your opportunity to block, they can't be used as blockers. But they are created immediately on the death of Hooded Hydra.