Hey 72superbug, I think it's cool that you have a bug. That was my first car and man did I love it!
You said that you don't know much about motors so I think your VW is a great car to learn on. These things are very easy and forgiving to work on. You can drop the engine by yourself with nothing more than a floorjack and stands. They respond extremely well to modifications.
I would drop the engine and determine exactly what is wrong. If it's just a piston locked in the cylinder bore then you can just replace the piston and bore. Alot cheaper than an entire engine.
Just a thought but you could try to turn over the engine with the generator/fan belt removed. I've had a generator locked up so tight that the engine wouldn't turn with the starter or a wrench.
I wouldn't concern myself with the transaxle unless you plan on building a serious street/strip car. Those trannies are pretty stout and reliable in stock form.
Man the memories!!