First thing I'd do is verify her story, to make sure the engine is really toast.
As for rebuilding it, if it's making "horrible noises" then I'd be inclined to rebuild a tired but running engine. In other words, buy an old engine for not much money but one that hasn't been destroyed by carelessness.
You also need to think about if this is all worth it. Unless this car is exceptionally clean and well cared for, by the time you buy and rebuild an engine, then fix all the other stuff on the car, you might find a perfectly clean good running '98 for similar money.
I'm not keen on buying a used high miles 2.5 engine and plugging it in, for the reasons I told you---the head gaskets.
so maybe the best thing to do is a) make a list of everything this car needs to be "clean" and "road ready" and what that would probably cost. A good Subaru shop can evaluate the engine if you can't get it started. If you are in the San Francisco area I can send you to somebody who knows what they are doing. Or b) start shopping around for '98s and see what they sell for (not asking prices, but selling prices--we are in a soft market right now).
Also don't buy any used Subaru that hasn't had new head gaskets put in, unless it's really low miles.