The carbide bits are really the best choice... you can get refurbished bits at a reasonable price from online vendors, like MPJA or Alltronics, BGmicro.
The thing is... this bits are fragile. You really need to use some sort of drill press and Dremel does a Drill Press Addon for standard Dremels. I use a standard drill press for mine...
In my case, I already had a Laser Printer, the right kind of paper, the drill press and the drills... so this works and is affordable for me. If you don't have these things already... then a board house really is the best choice.
As for transfer to cloth... there are special fabrics for Inkjet transfer. For toner transfer to cloth, you need some extra help.
Wintergreen oil (or synthetic is OK) has been used to release the toner from the print to the cloth in a NON-heat method. Use a paper towel to apply the oil till the fabric is wet. Don't move the design while doing the rubbing but the toner till transfer. Let dry and iron the transferred cloth with the image using a paper towel between iron and image.
This is a method my wife uses... untested by me.