I finally made labels to sew on my bags and I did it the cheapest way possible because that's how I role. I spent $7 for iron-on transfer paper. I like the way they turned out, nice and simple, I think that may be the key when using this method. I ironed my design on to scrap fabric, cut them out and then folded the edges down.
There's a lot of neat ideas for making your own labels on the cheap, here's a few I liked...
300 Labels for $20
Hand Stamped Labels
Labels Using Ink Jet Fabric sheets
Iron-on Transfer Labels