On September 9, 2008, Watford committed to play for Indiana University under Coach Tom Crean, turning down offers from Alabama, Louisville, and Memphis.

Upon committing he said of Indiana, "They have a real good basketball tradition there and I think coach Crean is going to come in and restore the program.

He was also the top Big Ten Conference freshman in scoring (12.0, 19th overall), rebounding (6.0, 11th overall) and free throw percentage (.800, seventh overall).

He finished 10th in the league in scoring with 16 points per game and was second in the Big Ten in free throw percentage at 84.3 percent.

On December 10, 2011, Indiana defeated top-ranked Kentucky at the last second on a 3-pointer by Watford, giving the Hoosiers a stunning 73–72 upset victory.

"[2] The Hoosiers earned a number four seed in the 2012 NCAA tournament and defeated New Mexico State in the second round.

[4] Although reports suggested Watford would enter the 2012 NBA draft, he opted instead to return and play for the Hoosiers.

In a statement issued by the Indiana Athletic Department, he said, "I'm looking forward to the opportunity to complete my degree and to continue restoring the winning tradition at IU.

Due in part to Watford's leadership, the Hoosiers finished the 2012–13 season as the outright Big Ten champions.

He averaged 12.4 points and 6.4 rebounds per game while shooting 48.6% from the three-point line, which ranked tops in the Big Ten ahead of his teammate Jordan Hulls.

Indiana earned a number 1 seed, and then went on to defeat James Madison and Temple University, before falling to Syracuse in the Sweet 16.