All B&W Compact Macs have a specified measurement of exactly 7.11" wide and 4.47" tall. This is based on 72 dpi, so that 512x342 should display WYSIWYG accuracy: an inch on your paper will match an inch on screen. Which of course means there's going to be a black border. This is the proper adjustment for a compact Mac display. Nothing else is correct.
That said, enlarging the image to fill the entire screen will not necessarily harm the Mac (however, enlarging it will cause a larger power draw and the voltages should be adjusted afterwards to avoid putting stress on the system), and thus is a personal preference. If you want to defeat WYSIWYG, then feel free to enlarge the window as far as you can. But keep in mind you are distorting the native pixel size, upscaling as it were, so that the screen will be less sharp. You also run the risk of distorting the square shape of the pixels so that the images are slightly stretched.
Also, be sure to synchronize the voltages after you set the display. It may take several attempts as enlarging the display will draw more power, raising the voltage may enlarge the display even more, and thus the display size must be reduced, and the voltage brought up slightly, and so on. In some instances, you will quickly see the limits (and state) of your PSU, as you may find you cannot expand the display to fill the entire screen and maintain the proper voltages. In the case of the original 128K & 512K, I would not recommend adding to the PSU load in any way. But an SE/30 with the most robust PSU and fan should be fine. You may also have to center and focus the resulting display for optimum picture.