headgaskets are a huge issue on that motor, they fail all the time. sypmtoms are bubbling in overflow tank and completely random overheating. folks are always surprised with this motor, how random it will overheat, but that's actually very common. compression, leak down, and oil/coolant mixing are worthless tests and mean nothing on that motor.
you'll want to verify the age of the belt, if it's old it needs replaced. actually the timing belt pulleys and tensioner need replaced to be considered a reliable daily driver in my opinion. a new belt is completely worthless on what are approaching 20 year pulleys. the pulleys are all old as dirt and devoid of grease by now. being a 96 it probably has the old style tensioner which is a good thing, they are much more reliable.
it's an interference engine so if the timing belt breaks or a pulley seizes you will incur bent valves.
ebay timing belt kits are great - they're inexpensive and include all the pulleys you need.
common issues:
knock sensor - you'll get a code and they're cheap and super easy to replace
torque bind - change the ATF and never tow it with two wheels off the ground or drive it with mismatched tires.
P0420 - catalyst efficiency code - just come back and search here for the $5 repair if it ever comes up. completely benign code that doesn't affect performance at all, it can't since that sensor isn't even used by the ECU.
cylinder misfire codes - means the plugs and wires need replaced. OEM NGK plugs and Subaru wires are best. don't get cheap wires for it if you go aftermarket, the cheapies can cause a cylinder misfire out of the box.
oil leaks - valve cover gaskets - very common.
if you do the timing belt - consider resealing the oil pump and tightening the backing plate screws with locktite - a few are always loose. it's easily done once the timing belt is off.
they easily make 250,000 miles if you keep them from overheating (headgaskets) and keep them full of fresh oil. other than the timing belt none of the things mentioned above will leave you stranded....so do the timing belt job thoroughly and these things can make a relatively cheap and reliable 100,000 miles.
i believe around 1996 there was a recall or frequent alternator problem. they're like $65 new from Subaru.