According to research by George Miller in 1956, short-term memory can hold seven pieces of information, plus or minus two. By chunking information, you reduce the number of items to be memorized. To memorize a string of numbers such as 3035551234 would be a strain on short-term memory since you have to memorize 10 numbers. However, it can be grouped in to three chucks such as 303-555-1234, reducing the items to be memorized to three groups. This allows quicker access to information in short term memory.
The chunks have to have some meaning to hold them together. The meaning can be implied by the teacher or created by the learner. For example, if the students were to memorize the states of the USA, you could break the states up into chunks. One way to do this is by geography (states of New England, the Southeast, Midwest, Gulf coast, etc.). Another way is to use time and chunk them by when the states were founded. Notice also how the chunks create an additional layer of meaning: Chunking the states by geography will also teach geography, while chunking by date teaches history.
According to Paivio's Dual-Coding theory, language and non-language items are processed by different aspects of short term memory, but are linked. For example, a picture of a cat paired with the word "cat" effectively chunks the picture and word together. Remembering the word will help recall the picture and vise versa. Sounds add an additional layer. Playing the sound of a meow with the image of a cat and the word "cat" casts three items as a single chunk, further increasing the chances of recall.
Chunking by constructing a meaningful group also helps information when encoded in long-term memory. The chunks of information are stored as groups in long-term memory, and to recall the items in the group, one needs only to recall the single group. The meaning placed on the group will help link it to other items in long-term memory, further increasing the chances of recall. For example, chunking states by history helps link the names of the states to important dates in American history.