The Google Classroom always listens to feedback from its users. Prior to this update, if students needed to create a Google Document, they had to click on the 'Add' drop down menu and in the Create section of the menu select 'Docs' to create a Google Document. A screenshot is shown below.
I know this has been confusing for students in my school and I am happy to see the Classroom team separated the two options into two different menus. This will help clarify the proper procedures for users. If a student wants to add or attach a file, or a link, they click on the 'Add' menu. If a student wants to create a document, slide, sheet, or drawing, they click on the 'Create' menu. A screenshot is shown below.