As you state, removing the rust, and then cutting out the weakened areas and welding in new is the RIGHT way to do it. If you can't afford to hire it done, then try looking into buying a MIG welder and learning to do it yourself. A decent 110V MIG can be had for under $500 with tank, just make sure you have a 20 amp circuit to plug it into. 15 amps will not work. How much bodywork can you hire done for $500? almost none...
I have never used the aluminum oxide, just silica sand. Make sure you use a respirator whenever you do blasting. No matter what you use for blasting media, its only going to get into the pits that are larger than the media. So the smaller the grit, the cleaner you will get it. Using a chemical remover like Oxi-Solve is another way to do it, but is slower than blasting. I usually blast to get most of it off, then soak in Oxi...
Be sure to keep moving and don't use too much pressure, or you can warp larger panels like trunk lids, quarter panels, etc... been there, done that...
Whether you decide to use something like POR-15 or not, it is best to clean up the metal as best as you can first. I have used it alot without problems, but you should always top coat it. Bodyfiller does NOT stick to it, and it doesn't like to be sanded, so I always spray on a coat of primer just as the POR becomes touchable, usually 1-4 hours after appllication, depending on the weather conditions and temperature.
Make sure you wear a respirator and cover yourself up when using this stuff, as it contains some pretty nasty chemicals. If you get any on your skin, you will be wearing it for a week. I have not found it to be as physically durable as RapRap suggests (like powdercoat), it comes off easily with paint stripper, and if the surface prep is not done right, it can be pealed off in sheets. Its better to brush it on than to spray it. I have never used anything from POR-15 other than the black or clear rust covering paint, and the Pelucid clear coat. I have some of there High-temp stainless paint, and there Glisten (sp?) 2 part clear coat, but haven't used them yet.
If you try the old screen and bondo trick to fix the holes, you will find that the filler will likely get hairline cracks wherever there is a metal edge under it. That is why you never use it to fill holes or seams. You always WELD them shut, and use filler to smooth and shape.
Most "internet experts" will tell you to clean the metal, weld in new patches, use EPOXY primer (like DP90) and then a sandable primer like K36, and don't waste you money on things like POR-15. Some will say when using body filler, to apply it directly onto the metal, others will say only over primer, and I say that I've done it both ways without any problems, and I will continue to use the POR-15 until I prove to myself that it isn't useful.
