Drum brakes are a bad idea, poor braking and they WILL fade (i.e. get even worse) on long mountain descents. You need new, alloy wheels. You can probably even use the old brakes, but I wouldn't.

This is part of why trying to modify this Varsity is throwing good money after bad. Sentimental value is dangerous in the inexperienced - she loves this bike probably in no small part because she thinks a new bike would feel much the same, but wouldn't have the same emotional significance. But a new bike would actually be so far superior that I think she would get over it.

Look at it this way: just as an example, a brand-spanking-new Giant Escape hybrid, depending on the exact model, will cost $400-$550 or so. You are already looking at hundreds of dollars in parts (new wheels, brakes, etc) for this Varsity. I assume the trip is already going to cost you something as well. For not much more than what you'll end up spending on the Varsity, she could have a BRAND NEW bike that is lighter, easier to ride, better with a load, and most importantly, SAFER. If that's too much money, you could go used and spend the same amount on, again, a lighter, easier, safer bike.

PLEASE consider doing some bike shopping. Don't believe that sentimental value is a good reason to keep riding a bad bike. Yeah, you can tour on anything, but a Varsity is bottom of the barrel, and the idea of riding a loaded Varsity down Rocky Mountains passes is horrifying, even with new brakes and wheels. It's a really bad idea. She should really get a different bike. If nothing else, the experience will be better.