I am testing the various different terminals that I tend to use to SSH into Linux boxes that I have Tmux set up on.
Basically I noticed this behavior, and I am hopi
You can use both set t_Co=256 and set term=xterm-256color together.
term tells Vim what terminal type to use, which controls the display/rendering of all aspects of Vim, including how to map key input, redraw the screen, move the cursor, display colors, etc. Normally, Vim can figure this out on its own via the TERM environment variable provided by your OS.
It's often helpful to set it explicitly in case the OS value is incorrect. This is especially true if you're connecting over a network from a terminal emulator that doesn't provide the correct value.
t_Co is one of many terminal options (used by the termcap system that Vim uses for terminal control). It specifically refers to the number of colors the terminal supports. Sometimes you need to override this if the terminal emulation is mostly correct, but Vim isn't correctly identifying the number of colors supported.
I use both of these options in my .vimrc to ensure that Vim uses 256 colors in tmux using all the terminals I like (Ubuntu's gnome-terminal, OSX's iTerm2, and Windows's KiTTY). I also have most of those terminals explicitly configured to send xterm-256color as their terminal type.