It’s always a smart idea to offer to write a letter of recommendation for a colleague who you know is well qualified for the job in question. Consider it good career karma; after all, you never know when you’ll need a letter of recommendation for yourself, and your colleague may be happy to return the favor.
Do graduate schools care if letters are confidential or not? In general, graduate programs prefer confidential letters. Admissions officials say that it displays more confidence on the part of the applicant if letters are "confidential" (meaning you, the applicant cannot see the letter). The Letter Service is required to indicate on the letter if it is confidential or non-confidential.