Why does this need to be included in the kernel directly and not just as a loadable module?
User space vs kernel space is the biggest decision and has a huge impact on nearly every aspect of the software. Wireguard has both user space and kernel space implementations. I'll link you to the Wireguard author's explanation as to why he chose to do a kernel space implementation: https://news.ycombinator.com/item?id=11994544
Base kernel vs kernel module is usually an easy one: almost everything that CAN go in a kernel module SHOULD go in a kernel module. Since modules can be loaded only when needed, it avoids using everyone's computing resources on features that not everyone might want. Wireguard is a kernel module.
In tree vs out of tree means whether you commit your code into the main linux source tree, or whether you distribute it outside of the linux project. Linux software development practices make it pretty annoying to distribute kernel software out of tree, even if it's a module. Basically, linux doesn't maintain stable APIs or ABIs in kernel space, so if you distribute in binary form you'll need to distribute different versions for every kernel version, and if you distribute in source form, your users will need to recompile whenever they update their kernel, which is pretty often if they're keeping up with security updates. DKMS helps with the recompilation process, but it's still pretty annoying for users. This announcement is about the proposed transition of the wireguard kernel module from out of tree to in tree.