Working for free is fine, once in awhile. When you look at it in the long-run, doing someone a favor now could really benefit you in the future. Ultimately, it's a gamble, but I like the excitement of the risk. I also like the kind of friendship you can create from giving your work away generously.
Here's the thing, for the client's perspective: If you ask someone to work for free, you need to trust them. What you would be paying for is some sort of creative input, and since you haven't paid up you need to leave most of your creative opinions at the door.
I recently asked a friend for a favor, to work for me for free. What I offered was buckets and buckets of creative trust. I might have had a few aesthetic requests, but ultimately I needed to accept what I've been given. And the end result was awesome.
The work is always better because of trust.