OK so my sister is going to Australia for a study abroad. We have AT&T and I was wondering if we will be able to call her or if she'll even be able to us her phone? Do we need to upgrade our plan to cover that area of the world or is that not possible at all?

You have to ask her mobile provider to SET her phone for ROAMING. Her phone must also be a tri band (can work to 3 continents including OZ.) The provider partner in OZ must also have a clear signal specially the place where your sister will stay.

Call AT&T for assistance.

Skype and a high speed internet connection is probably the cheapest. Computer to computer is free, computer to phone is slightly over 2 cents per minute for calls to Australia. Subscription is $3.00 per month.