A while back I saw a tutorial on Instructables on how to make a t-shirt necklace. Best one I've seen so far, in fact. I would link to it but the tutorial has been taken down by the author. Anyhow, the necklace was the inspiration for this headband. Simple directions below.
L or XL t-shirt, preferably cotton jersey
Lay t-shirt flat. Cut one inch strips from the sleeves with the rotary cutter. You should be able to get 8-10 strips out of one shirt.
Stretch the strips until they naturally curl up like the picture above. This also makes the perfect sized headband for the most part.
Place seven or eight loops together. Match up the seams from the shirt.
With an extra t-shirt strip, wind it around all the t-shirt loop seams. Tie in a knot. Tuck the loose ends into the knot you just created.