What's the bad?

If any real troubleshooting needs to be done, which may be as small as a quick-and-dirty config file edit, you're shit out of luck since all the game files are under UWP crap lock-and-key. Forget about modding anything, for that matter. I ran into serious issues (some games not running or stopping to mid-game) with my $1 trail subscription last Fall, and that was pretty much enough to tell me it's not worth the hassle and wasted time. They can keep their crap service.

I don't know how this works, but a very recent update for Xbox for PC App now allows for modding, supposedly.

I would guess these games' mod folder might be in a separate folder (maybe somewhere in my My Documents? or elsewhere?) than the actual [locked-down] game-folder?

Has anyone experimented w/ modding in the recent update for a Xbox for PC Game Pass game?

The way I see it is that it's okay if it's for something that you would only play once and never revisit. For example, I recently played through Halo Reach and Gears of War on my trial subscription, neither of which I'd want to revisit in the future despite both being enjoyable. I do agree that the difficulties modding mean that I wouldn't have it for a long term game, but I enjoyed my trial subscription.

That being said, I won't be paying for the service as I still prefer owning my games.