Cheapest option is often to swap in an EJ22 engine, they are plug and play. My friends car (same engine as yours) blew - I found a 1995 EJ22 for $300, installed all new timing belt kit for $100 and he had a great engine for only $400. Pay a mechanic to install and you're under $1,000 and get a more reliable engine out of it. A 1995 Automatic EJ22 is plug and play. Any 1995-1998 EJ22 with EGR is plug and play if you also get the exhaust manifold with it.
Car-Part.com--Used Auto Parts Market
is a great resource in the US and where I found the $300 EJ22.
Then you can sell your EJ25 block and recoupe some of your costs, they're quite valuable since they blow all the time.
Subaru isn't going to do that swap though.
Your valves definitely are bent, unless you're really lucky. They should do a compression test just in case you're lucky - it does happen, I fixed a friends last year which broke and is a non-interference engine. I tossed a new belt on and it was fine, first time I've ever seen it though.
You could probably get it done for $500 - $1,000 less elsewhere with some searching but may not be worth the tow/time.
They should not be leaving the original timing belt pulleys in place. All timing pulleys and the tensioner should be replaced. They are expensive from Subaru though - the ebay timing kits run about $160 - $180 for your motor. for all new belt, tensioner, and pulleys. They didn't include the lower sprocket and two idlers in their quote -that's another $200.