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Since t-shirt fabric is knit, that stretch can be challenging to work with.
There's no reason, however, it can't be stabilized with interfacing and used like a woven.
Saltygal has a great example of applique on a tote.

Something like this would be a fun way to focus on some of the great images on tees.

Consider collage also.
Patchwork.
Embellishment with embroidery.
Pleating.
Any other ideas??? Go for it!