You mention that this will be your first pieced quilt. Given that, I would also go with the 2nd option. No HSTs or foundation piecing. As far as lengthwise or diagonal, I've probably seen them both ways. Your quilt, your design choice, although going back to your '1st pieced quilt' statement, I would go with on grain even though you've starched them. I love recycled shirt quilts! Please post a photo when you are done.