Update: The car was taken to an independent shop to confirm my speculation about a faulty idle control valve. $500 later ($400 for the idle control valve), idle is back at 600-650. Pretty expensive confirmation of all my "diagnosis." I didn't want to shotgun parts though. My friend is happy even though he felt a little ripped on the price of the valve.
Here's a related problem that was also fixed by the idle control valve. -->
1991 420SEL Fails CA emission due to advanced timing