Hi, I got some info from a lady on Craigslist who was selling this stuff. I asked her how she made it, I finally tried myself, and it worked!
1) Rip up junk mail, newspaper, etc and place in a zippered pillowcase cover or some other bag with a zipper. I wouldn't fill it more than half full. A cross-cut paper shredder might do the same thing.
2) VERY IMPORTANT (and I figured it out myself after a horrendous disaster): Use a safety pin to secure the zipper pull closed--Pin through the zipper pull to the cloth itself. Otherwise the bag may come open, spilling paper pulp in a huge huge mess that could potentially ruin your washing machine.
3) Put pillowcase(s) in washing machine. Run on a normal cycle. Add detergent and white vinegar (I do about 1/4-1/2cup) to help remove the inks. Most inks used these days are nontoxic, but getting some out makes it look better.
4) Option A: if you have a condensing dryer--also called a European-style dryer. I have this--my washing machine is one of those things that has one tub and does both washing and drying. The way it works is it mostly uses spinning to get the water out, and then a little bit of hot steam to get the rest out. They're used in European apartments, boats, RVs, and some apartments in the US. Mine cost me about $1800 but it was totally worth it for about a million reasons. If you have this dryer, just run the bags on a dry cycle and they'll be done.
Option B: If you have a traditional hot air dryer--the kind that has a vent, sometimes runs on gas (sometimes electric)--it has a lint screen, etc etc, I don't know if you can use it to dry your pulp. I worry that it might burn the pulp. You can try it, watching closely for fire (perhaps on a low-heat setting?), and report back here. Other option is to spread the pulp out on a large area (countertop, an old window screen) and let it air dry. You can speed it up a little by putting it on a baking sheet in the oven at its lowest setting--again, watch for burns.
5) Break apart the larger chunks, and use!
Some people add baking soda before they dry it to absorb odor, but I haven't tried that yet. It's a bit dustier than traditional Carefresh and the chunks aren't as uniform or fluffy, but it's nearly free and if you have a European washer/dryer, it's easy as doing a load of laundry.
It's hamster approved!