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By default, under Submission types, File submissions should already be checked. If not, simply check it.
Launching the PDF annotation editor
When you are logged in to your Course Site course, click on the assignment you want to grade. You will see the list of submissions, as you usually do. Please note that this annotation feature only consistently works with PDF files, so you may want to instruct your students to only submit PDF files if you want to use this feature for all submissions. Once you verify the student's submitted file is a PDF, click Grade.
After you are finished annotating
Once you are complete and save the file, your annotated version of their submission will show up on the assignment submission listing under Annotate PDF.