I've actually written a lot of letters of recommendation for college applicants and college transfer applicants. I always worried that I wasn't doing them well enough to benefit the students.
Then...I had the wonderful opportunity to be mentored by a longtime professor who sat on many admission committees. He said that letters that give general praise ("This applicant is hard working, dedicated, and an asset to her community.") are immediately eliminated from consideration. Letters that do not specify the author's relationship to the applicant are also ruled out. You should outline the time frame of your interaction. For example, instead of simply saying, "Katie was my student." You could say, "Katie was a student in my English class for the 2003-2004 academic year. I came to know her better as the advisor of the student newspaper during Katie's year-long tenure as Editor-in-Chief." Then, go on to describe what specific interactions in this context helped you to see Katie as hardworking, dedicated, etc.
If you do not feel that you can give this kind of detailed recommendation, be honest with the student. Explain that you would gladly recommend her/him, but you may not have the kind of information that the committee would want to see. If the student feels that you are her/his best choice, ask for a list of extracurricular activities and academic accomplishments before you write the letter.
Hope this helps! I had some really eye-opening conversations about this with my teaching mentor
Erica