I have a set of problems in the following format:
<set>
	<p class="directions">Write <span class="letter">S</span> if <span

class="term">sentence</span>; write <span class="letter">F</span> if <span
class="term">fragment</span></p>

	<p class="nl">&#9;1.&#9;Sentence (or fragment) here.</p>
	<p class="nl">&#9;2.&#9;Another sentence/fragment here.</p>
	<p class="nl">&#9;3.&#9;Yet another.</p>
</set>

For a dropdown menu object, I need to replicate the choices in the

directions for each item and number the choices sequentially starting with
zero:

<write_choices>
<!-- These are the choices for item 1-->
	<write_choice num='0' letter='S' term='sentence'/>
	<write_choice num='1' letter='F' term='fragment'/>
<!-- These are the choices for item 2-->
	<write_choice num='2' letter='S' term='sentence'/>
	<write_choice num='3' letter='F' term='fragment'/>
<!-- These are the choices for item 3-->
	<write_choice num='4' letter='S' term='sentence'/>
	<write_choice num='5' letter='F' term='fragment'/>
</choices>

Not all sets of problems have just two choices like this one. Some have

three, others have more. Because of the variable number of choices, I decided
to use grouping. For example, here is a section of the transform that produces
a perfect set of <write_choice> elements for each item. The selected node is
<p class="nl"> and a copy of <p class='directions'> is stored in <xsl:variable
name="myDir" />

<write_choices>
	<xsl:for-each-group select="$myDir/p/*"

		<write_choice>
			<xsl:attribute name="letter">
				<xsl:value-of

			</xsl:attribute>
			<xsl:attribute name="term">
				<xsl:value-of select="current-group()[2][self::span[@class='term']]"/>
			</xsl:attribute>
		</write_choice>
	</xsl:for-each-group>
</write_choices>

output:

          <write_choices>
             <write_choice letter="S" term="sentence"/>
             <write_choice letter="F" term="fragment"/>
          </write_choices>

I hope I have now better understood the problem, I think you can group
your p[@class = 'directions']/* elements once and store the result, for
instance as a sequence of maps.

Then you can push the map for each of the p[@class = 'nl'] through a
template creating a write_choice:

<xsl:stylesheet xmlns:xsl="http://www.w3.org/1999/XSL/Transform"
  version="3.0"
  xmlns:xs="http://www.w3.org/2001/XMLSchema"
  exclude-result-prefixes="#all">

  <xsl:template match="set[p[@class = 'nl']]">
    <xsl:variable name="groups" as="map(xs:string, element())*">
      <xsl:for-each-group select="p[@class = 'directions']/*"
group-starting-with="span[@class = 'letter']">
        <xsl:sequence select="map { 'letter' : ., 'term' :
current-group()[2] }"/>
      </xsl:for-each-group>
    </xsl:variable>
    <write_choices>
      <xsl:apply-templates select="p[@class = 'nl'] ! $groups"/>
    </write_choices>
  </xsl:template>

  <xsl:template match=".[. instance of map(xs:string, element())]">
    <write_choice num="{position() - 1}" letter="{?letter}"
term="{?term}"/>
  </xsl:template>

I certainly see no need to nest for-each-group and iterate but you could
of course use iterate instead of the apply-templates:

  <xsl:template match="set[p[@class = 'nl']]">
    <xsl:variable name="groups" as="map(xs:string, element())*">
      <xsl:for-each-group select="p[@class = 'directions']/*"
group-starting-with="span[@class = 'letter']">
        <xsl:sequence select="map { 'letter' : ., 'term' :
current-group()[2] }"/>
      </xsl:for-each-group>
    </xsl:variable>
    <write_choices>
      <xsl:iterate select="p[@class = 'nl'] ! $groups">
        <write_choice num="{position() - 1}" letter="{?letter}"
term="{?term}"/>
      </xsl:iterate>
    </write_choices>
  </xsl:template>