I agree that this is a security problem which should be adressed.
also, the auto-generated passwords does not comply with ATutors password policy ("a combination of letters, numbers and symbols, 8 characters minimum, 15 characters maximum").
Completely random passwords are however very hard to remember, so I would suggest to generate passwords like:
usernameXXX
..where XXX equals three random numbers. user "vegard" could then get the password "vegard279" which is in line with the password policy, is not straight forward to guess, nor impossible to remember, and easy to explain to users. Maybe also a check to make sure the password is atleast 8 characters?
I also agree with Indie (I think), this should not be a new option, it should just be changed! :)