Have a conversation with the student. Your letter will be informed and serve the student better if you know a bit about who he really is. Even if you know him fairly well, make sure to ask him about his future plans, how he'll be spending the summer and what prompted him to apply to grad school.
Ask for the student's resume, transcript and personal statement. If you were her boss or professor, you will probably already be familiar with either her resume or transcript. A personal statement is an essay required by some graduate institutions, such as law schools, that outlines the students intentions to get into that specific graduate field. Ensuring you are familiar with all three helps round out your impression of the student and allows you to write a more personalized letter that will serve her better in the long run.
Start writing. In the first paragraph, introduce yourself, state the purpose of the letter and outline your relationship with the student.
Expand on examples and traits related to the student's performance. Try for relevant, detailed examples of how they overcame difficult situations, demonstrated strong critical or analytical ability or overcame hardships. This is also the section to explain away any potential weaknesses in a student's application. If his grades were on the low side, but he worked 20 hours a week assisting you in your doctoral research project, you should probably say so.
Close your letter with a specific recommendation. Demonstrate your confidence in the individual and specifically express your certainty that he would be an excellent fit for their graduate program. Reiterating any outstanding strengths the student has are applicable here as well.
Sign the letter by hand and contact the student to determine the best method for getting the letter to the graduate admissions office. Unless the student expressly asks to see the letter, don't send him a copy. Some graduate schools may be impressed by students who are so confident of their references that they wave their right to see their letters of recommendation.