Will their combined income be used for Financial Sponsorship (I 864), or can they use others to sponsor and meet the 125% income level?

Generally a foreign national in the U.S. with an H1B visa, who becomes married to a U.S. citizen, may complete a marriage-based adjustment of status application process. The U.S. citizen must file with the suite of applications a Form I-864 Affidavit of Support even if her income alone is insufficient to meet the requirements. The U.S. citizen spouse may demonstrate her financial ability to meet the requirements based upon a relatively new job, but that will require such things as an appropriate employment verification letter from the employer, an employment contract and/or evidence that she is actually receiving the contracted wages. The foreign national spouse also may participate in the Affidavit of Support process and have his income included when legal requirements are met. Beyond the forms mentioned in your question, the couple will need to file other material too, including Biographical Information forms, birth records, evidence that the couple is living together in a bona fide marriage, etc. There is no legal requirement to file a Form I-131 application, although when a foreign national is in valid nonimmigrant status at time of filing it usually is appropriate to file that, too (the USCIS no longer has a separate and additional filing fee for a Form I-131 application). The application process often can be significantly more complex than it might appear simply by reading the forms, their instructions and material available on the USCIS website. Errors made in preparing the forms and supplying supporting documents can cause delays and even more harsh consequences. Especially since it appears that your daughter and her fiance are less than thoroughly familiar with the application process, it would be wise for them to work with an immigration attorney.