My daughter and I share our iTunes account.

But it dawned on me that this will be a problem when she goes to college.  Can I possibly start her a new iTunes account and then have her have all the music that we have gathered together over the last 5 years in her account and mine?
My friend was trying to explain how to do this, but I am just looking for a step by step, hold my hand tutorial or something.  My daughter will be devastated to lose all of our music that we share.
Thanks!

iCloud is designed to be used by one user with all their devices "linked" together.  Your daughter needs to have her own icloud account.  Using one Apple ID for an iTunes account is a different situation, you can certainly share the account with your daughter.  That way she can access purchased items without paying again.
If she already has another icloud account, and wants to set it up on her device, then go to Settings>icloud, scroll to bottom of screen and tap Delete Account.  This only disconnects the device from that account, no data is lost on icloud.  Then enter the account ID that she wants to use.
To create a new icloud account, go to
http://www.apple.com/icloud/setup/
As for your lost contacts, they are gone.  You only hope is if the contacts were also on your computer and (if gone now) you have made frequent backups of the computer (like using Time Machine on a mac).  Just restore the contact files back to your computer.

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