by ben reynolds.
You need to turn on Groupings. Site admin > Miscellaneous > Experimental > enable Groupings (that's in 1.9) Experimental may have been moved, but it's still somewhere.
Then, when you go to the course > Course admin > Users > Groups, you will see a tab for Groupings. You add a group to a grouping.
Next, go to the assignment > Edit Settings > Common module settings > Show Advanced > Group Mode > Separate Groups (my preference) > check Available for group members only, then Grouping > select the grouping.
Save. You are golden!