I know there are going to be some roleplayers who are going to disagree with me, but I believe you can know too much about the overarching story. Let's say you have played through Star Wars: The Old Republic as a Sith, and now you are aware that the Sith Emperor is, for instance, Gav Daragon. Is the average Republic soldier going to know who that even is? If you're thinking, "Sure, we would. Gav was the Sith apprentice during the Great Hyperspace War," I will ask you this: "Who was Abraham Lincoln's Vice President during the Civil War?" Don't look it up! I don't know off the top of my head. I would be hard-pressed to find someone who did, except for my uncle -- he's a history nut. The point is, knowing who the Emperor is can change our gameplay.
It's not always a bad thing to have more information than your character knows; it can help you establish your character in the world a little better. Perhaps it will give you more of a vested interest in how he affects the world around him. However, you are missing some of the mystery. Wasn't part of the fun of Mass Effect in not knowing whether saving the Rachni queen will have detrimental effects on the rest of the story or will have lasting impressions on Mass Effect 2 and 3? So what does the average person know in Star Wars: The Old Republic?
Most of what a person would know about the galactic struggle would depend on where he grew up. For instance, if you grew up on Coruscant and are about 30 years old, you would probably remember the Hydian Way blockade, but if your character is younger than that or did not live on or around Coruscant at the time, he may not even know about it.
Mandalorians are a popular culture to play. All Mandalorians would remember or have learned about the rise of the new Mandalore, but I doubt the average Mandalorian would have any clue that this Mandalore was a puppet of the Empire.
I would venture to guess, however, that the Sacking of Coruscant was one of those historic moments when everyone remembers exactly where he was when the event happened. It shocked all of the Republic and solidified the Sith's victory in the galaxy. Everyone is going to know about that -- even people who happened to be herding nerfs in a pasture on Corellia.
Speaking of Corellia, any Corellian or pilot worth his salt would know that this planet has now been cut off from the rest of the galaxy. When a major starport goes off the grid, pilots know about it. This could also be a jump point for your character's story if he happens to be a freighter pilot.
Time and life spans are the huge factor here. Humans, or most of the player species choices, would be approaching their twilight years if they had been born at the start of the Great Wars. And the vast majority of humanoids who fought at the start the war would be elderly. The beginning of this Great War was approximately 60 years ago -- 28 years before the Sacking of Coruscant. However, what we do know would be taught in history books, just as the World Wars are taught to us. Our grandparents would talk about it and history teachers would give us an overview, but details would be a bit sketchy in areas.
If your character is a Jedi, you may have a more complete understanding of galactic history, but it would certainly be skewed to fit the Jedi philosophy. The Sith would be portrayed as the bad guys, and the Jedi would be selfless heroes. In fact, given what happened to the Jedi following the Sacking of Coruscant, I would think that the Jedi would probably show a bitterness toward the Republic in their historical records.
On the flip side, a Sith would most definitely see the Jedi as weak and would perhaps have been taught that Imperial government was proven the rightful ruler, given the Republic in-fighting and how easily the Empire subdued it. Students would also be be taught the efficiency of the Imperial way of life.
Although it will be extremely difficult for me to do this in my position, I recommend learning as little as possible about the history in the game if you want to live in its world. However, I know that is going to be nearly impossible. What I do is have a checklist of events my character is aware of, so if I am approached by another player (or maybe an NPC in SWTOR), I can reference the list and respond accordingly.
Another great way to limit your character's knowledge is to deliberately limit your scope when studying for your character's backstory. For instance, only read about the planet your character is from or only read about your character's species. This way your practical knowledge will match closely with your character's knowledge.
Finally, I have found the best way to prevent your character from becoming an exhaustive encyclopedia of Star Wars lore is to enjoy the moment. React without thinking too much about it. Don't think about about whether it is right or wrong given the history or what the overarching effects will be. Just do it. As Qui-Gon Jinn said, "Remember, concentrate on the moment. Feel, don't think. Use your instincts."
Star Wars: The Old Republic is finally here, and the Force is with Massively! We've prepared a Hutt-sized feast of class introductions, gameplay guides, lore roundups, and hands-on previews to help you navigate the launch period and beyond. And don't forget our weekly SWTOR column, the Hyperspace Beacon!