Hi Phil,
With an enduring love for Italy I clicked on this forum thinking it might give me fodder for my next vacation there but found the responses you'd gotten so far quite discouraging, so I thought I'd add my two cents to give you some hope and some potentially helpful information! Going over New Year's you will want to give some consideration to where you will be on the busiest holiday days and book accommodation ahead of time; and true, Italy is not Indonesia in terms of prices. But I doubt you expected it to be so and being on a student budget definitely does not preclude vacationing in Europe! In fact, in my experience (always traveling on a 'student' budget whether I have been a student or not!) Italy is one of the cheaper countries in western Europe to travel. And it's all relative to what you are used to paying and your expectations....living in Canada at the moment, I was shocked at the price of food here, so I think you will be pleasantly surprised in that aspect, plus the Canadian dollar is rather strong at the moment!
I'm not really sure what all the talk about horrible weather is about; I lived in Italy over winter and never had exceptionally bad weather or long stretches of it, though you will definitely want to take warm clothes and possibly pack an umbrella if you are planning on being outdoors, rain or shine! (Also lots of old Italian buildings aren't heated to the same degree you may be used to; I was always freezing in my apartment, so take layers so you will be comfortable no matter what the heating is like!) If you want to go to the Amalfi Coast, I know I stayed in a hostel in Atrani a number of years back, very basic, but student cheap ;-) You could also take in Naples for some excellent food and do a daytrip by ferry to Capri or Ischia, and Pompeii is quite fascinating too, if you don't want to spend all the time around Amalfi and Sorrento.
Other ideas would be to go to Puglia (Apulia), the 'heel' of the boot, which is going pretty far south, so you get the maximum of non-Canadian winter weather ;-) There are night trains to both Brindisi and Bari, which would help you guys save on a night's accommodation each way from/to Rome and there are a number of interesting places in Puglia, like Otranto, Ostuni, Gallipoli, Lecce, and the funky trulli houses of Alberobello (http://www.worldheritagesite.org/sites/alberobello.html). I assume you have or will have a guidebook to look into things more and find potential hostels? If you're just going a couple of weeks you could also check some budget guides out like Lonely Planet or Let's Go Italy from the library and save yourself a bit of dough on the guidebook too!
Or you could hit a bit of the Amalfi Coast and continue down the west side of the peninsula to Calabria with more great seaside towns and spicy food! If you really wanted you could even get down to Sicily, which is an interesting experience and great food, can hike around Taormina and climb the volcano Etna. You can get down by train and once again try a night train to save on some accommodation on the way down.
Another great spot is the region of Le Marche. This is northeast of Rome, not south, but I personally think it's a fabulous spot....the landscape is just like Tuscany -- which is probably the best known area for biking and walking tours -- but without all the tourists (and corresponding high prices) and with better beaches! The city of Urbino is great for poking around, as well as seaside towns like Fermo and San Benedetto del Tronto.
The Cinque Terre are beautiful and lend themselves nicely to hiking between towns but I'm not sure if the weather is the best for it that time of year and when I was there anyway there was only a hostel in one of the 5 towns.
Looking for cheap accommodations make sure to compare what you find in guidebooks with what you can find on hostel booking sites online like www.hostels.com and look for the hostel's real webpage to book before you book online if you are so inclined, as often there are price discrepancies between the booking site prices and the direct website prices. It really varies from place to place how you get it cheapest but the more you shop around the better deal you will get!
Another tip for you to stay on a student budget is to pay attention to the meal options. Breakfasts are small, usually cappuccino and cornetto or in Naples the lovely sfogliatelle (you must try if you go!) but it's cheap and a nice cultural experience in a local cafe. Lunch is the biggest meal of the day and is probably cheaper to go out to eat for lunch than dinner if you are limiting yourself to eating out to one meal a day. Look for a tavola calda and trattoria for cheaper options than a 'restaurante' (usually) and keep in mind that many hostels have kitchens for you to cook in and that just going to a supermarket or local deli or pastry shop can be exquisitely rewarding in a culinary sense, so you don't have to just eat out to enjoy the delicious cheeses, smoked meats, sausages, antipasti, baked goods, olives, and wines of Italy! And don't forget the gelato ;-)
If you have any questions, feel free to mail me.
Buon viaggio!
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