You can't let seedlings dry out completely, if they are wilting it wont be long before they are dead. In general, if you let your soil dry out too much you wont get good root growth and may also start to see "deficiencies" which are just due to improper watering.
Overwatering is from lack of oxygen in the rhizosphere. Plant roots breathe oxygen, and oxygen doesn't keep dissolved in water very well. If you have a quality medium/potting soil it shouldn't compact and should remain aerated when wet. Coco coir is an example of a media which holds both moisture and air very well. Don't be afraid to water properly as nothing should go wrong unless the containers have been sitting in stagnant water, or the media is too compact and constantly saturated.