EA81Ts!!! I just took a peek at my '84 w/ TSB kit and coolant is pulled from below the thermostat housing, over the top of the engine to the turbo.
The return line drops out below the turbo's bearing housing, wraps around the valve cover and dumps into the leading edge of the bottom of the passenger's side cylinder head.
What turbo you want depends on what you are willing to do for the sake of durability and what your budget will allow. I ended up having a custom stainless header built because my factory one cracked badly on the return leg of a road trip to Whistler, B.C. This is the result:
A link to more pictures can be found in my profile.
I could have gone with a larger turbo, given the opportunity to change the turbine inlet flange. I may in the future, but I just got my WRX back on the road and funds need to go elsewhere before I can come back to the wagon.
I would say that you probably want a water-cooled turbo for increased longevity, but if you are fastidious about warm-up and cool-down procedures and oil changes/maintenece, an oil-cooled turbo is all you need, but you have less of a magin of error.