I think AT&T could activate it as a second phone line and give her a SIM card for it. They charge per line or per number and both phones can't share the same number. I imagine she could use it as an iPod, but honestly, the experience would be bad since it can't be upgraded to the latest iOS.
She can activate it as a second line for another $20 or $30 a month and just restrict the permissions so it can be used as an emergency line. They won't make you sign a contract if you're just adding another line without buying a new phone. I believe it's the new phone subsidies that require contracts. I also thought that maybe you could buy some prepaid phone cards, but those expire every month, so there's no difference really.
Looks like her only choices are to have a really old iPod (wifi only) with no way to install current-gen apps, or to have an emergency phone that she'll have to pay monthly for.
Or, she could just forget it and sell it on a site like Swappa and get ~$40 bucks for it.