You need two strings: The original string of all the letters, and a 2nd one, which consists of stars initially. If the users selectes a letter, the corresponding elements of the star-string are replaced by this letter.
original = 'hello world';
stars = original;
stars(~isspace(stars)) = '*';
selected = 'l'; % lower-case El
stars(original == selected) = selected;
BTW. this is a nice homework. You can learn the Matlab basics as logicla indexing and assignment of scalars to arrays as well as the string handling.
