Depends. How are you stroring your passwords?
Are you using the native MySql user/password table?
If so, you can limit each user to SELECT ONLY, or any other type of access you want to grant them to your DB Tables.
This table does automatically hash the Passwords.
If you are using a seperate table for Passwords, and all it's doing is essentially allowing a user to say, create a session and access certain portions of your site, I would say it's not that big of a deal the passwords get encrypted.
But I would still encrypt anyway, it doesn't hurt, and you will learn about the process.
You could also explore AES and DES.
ANd like the user above said, let them re-set their passwords when needed, since you can't un-hash MD5.