250 cds on a 40gb gives you a lot of options if audio quality is important to you. Many folks here will suggest using "Exact Audio Copy" (EAC) with the Lame encoder (V3.96 is the latest, IIRC). You can set the rip-rate to one of the higher "presets", Alt-Preset-Extreme, and still fit all of those CDs and then some (many). I am not the techiest dude around, and I cannot really figure out how to use EAC nor Codex, two highly recommended pieces of software for ripping CDs. If you are inclined, no one says any other software beats EAC.
Others, like me, who have iPods, use iTunes to rip CDs and use the AAC (mp4) format. If you use iTunes, make sure you do not rip MP3s; use AAC. iTunes does not have a good MP3 encoder (but their AAC/MP4 encoder is good). Some go for the best Apple can offer and use the Apple LossLess which requires a lot more space, but is of the highest quality Apple can provide.
A 40gb is quite huge for merely 250 cds, and you will have lots of room for future cds, so that's cool. I have used about 13 gb on my iPod (20gb 4G version) ripping at 224 or 192 kbps in the AAC format.
If you desire utmost quality, then you should encode with either Apple Lossless, EAC (using one of the higher preset settings), or AAC (high bit rate setting; eg. 224). After a while, it would be difficult to discern much sonic differences using an iPod, so if a gun were to my head, I'd say, for simplicity and maximing the 'Ipod/iTunes experience' (which is a nice combo), use AAC and rip at 224.
Go to this thread here and you're going to see a lot of opinions, the majority of which recommending EAC.
http://www4.head-fi.org/forums/showthread.php?t=95631
Oh, regarding problems and remedies -- I've done my master's and doctoral dissertations already. You'll need to do some research here to learn more about this. I read through the Apple discussion forums before I bought and configured my iPod; it was quite useful and helpful. THAT is the THE place to go to learn about configuring your iPod and troubleshooting (fer sure).
http://discussions.info.apple.com/
- walkman666