1) We were there 2 days before it and 3 days after it! Got busier at it came closer, was crazy the day/night of, then quieted down the next day
2) There are obviously people there trying to take advantage of tourists, like anywhere. Familiarize yourself with common scams, and use common sense (ie don't carry your wallet in your open back pocket) and you'll have no issues. It does get annoying when every other cab driver / person on the street is trying to scam you, but I would never call it dangerous. Thailand is super touristy.
Cab drivers will want a flat rate and turn off their meters (make sure they keep them ON), or may try to drive the long route.
Never take a tuk tuk as the majority just take you to a "shop" and try to sell you over priced wares.
If someone says a temple is closed and offer a bus ride to a different one, they are lying.
Things like that.
3) Koh Phangan has dozens of great places to stay. I'd suggest looking online to book for the full moon party. We were in a bungalow halfway between the port and the full moon party beach. You can book in advance to some places online but not all places do this - plus you get a better sense of how good a place is if you show up and look around first, depends how comfortable you are winging it. For example, where we stayed in Koh Phi Phi was close to all the noise, but we ended up looking for a better place and found a really great one.
4) Koh Phi Phi and Phangan are definitely party-central. You'll be hard struck to NOT find a good beach, as there are the other islands by Phangan (tao and samui), as well as dozens of others (krabi).
5) Just one traveler backpack. The domestic flight I believe was ~$89, not a whole lot more than the train and way, way faster / more convenient.
6) I recommend picking up
this book for things to do and see.
We also did Phuket and Phi Phi, as well as the rain forest in Khao Sok. Most people also go to Chang Mai up North and/or Krabi near Phuket.