If I was to replace the head gasket on that car I'd probably be charging about $1100 so I think the quote is fair.
If you decide to do this I'd recommend replacing the head gasket, not using steel seal or anything. Those are temporary fixes that can, and most likely will, quickly cause major damage to the water pump, radiator, heater core, etc. Bad idea.
If a head gasket is replaced right, by a good mechanic, you shouldn't have future problems with it. Be sure it's a mechanic you trust and, often times, I've found that dealerships (good dealerships) have more expertise at major overhauls like this. I'd advise that you do a couple things.
1. Don't use steel seal or the like. It'll cause more problems than it'll help.
2. Be sure to use a reputable mechanic to do the repair. This is a delicate, time consuming, difficult repair and it must be done right. If it's done right you'll be in good shape.
3. Check a quote on an entire engine replacement. I am shooting from the hip on the cost of Suburu engines but, if you plan on keeping the car a long while, and get lucky with a quote in the 2500 neighborhood it might be worth it. However, a good gasket job will get the current engine running like new, if done right.
Just take stock in the condition of the whole car and decide if it's worth it to you. 1000 is a decent down payment on a new car so you may want to move to something new. At that mileage your transmission might be getting weak and I'd hate for you to put 1000 dollars into the engine, drive another year and have to put 1500 into a new tranny.
