Maked way to select user to dialog with him - selecting from combo-box - it allways was bad idea. I think, there are need to be user search capability like in cource teacher managment page...
Timeout occurred when moodle make drop-down list with 6000 positions.
You can partially fix problem in your server (by enlarging server timeout to php pages), but problem located in archtecture of that page of module dialog.
General plugins
timeout in a course with a large number of students
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