I did undergrad in Cambridge, and I think I'll be going there for law school, so this is what I know:
Having a car is nice if you're going to be going outside of Cambridge a lot (i.e., if you live nearby) - otherwise, a complete nuisance. You can get a decent studio near Harvard Square for $1000-1200 a month (not cheap!), and Harvard law housing is limited, so you have to enter in a lottery (and it's not great housing either). A lot of students in their 2L years rent houses/larger flats with friends (much cheaper).
Commuting would be an option, but you'll have about 15 hours of class a week or more (plus whatever other activities you're involved in!), so it will be an extra burden. A bike might be a possibility - living in Somerville would work with that.
Personally, I think the extra expense of living within walking distance is worth it. Cambridge is a great area, and you'll be near the atheletic and academic facilities.
My two cents!