After installing ion auth, I get a CI error saying I must set an encryption key to use the session class. When I set the key, however, I get a php 500 error on each page load. What could be the cause of this?
I think it could be related to your hosting and not to CI or ion auth.
Read http://www.cyberciti.biz/tips/http-error-500-internal-server-for-php-pages-and-solution.html
How should I have my codeigniter/database configured from a fresh install?
see configuration @ http://ellislab.com/codeigniter/user-guide/database/index.html
