When I was there we stayed in the Nunnery. It's near the city, but in a nice little area just outside. Kinda like ranelagh I guess. That said, I didn't love the hostel too much, but it might be different if you have a private room. Actually I'm pretty sure it would be different. Other than that there are a million backpackers and hostels in St Kilda. St Kilda is nice enough. It's got one or two good music clubs, but it's also home to 95% of backpackers, 80% of whom are Irish or British, it's also the area of town to go to for the beach, cakes, heroin and prostitutes. If you do go to St Kilda, make sure you check out the rest of the city too. St Kilda is grand, but the rest of Melbourne (Richmond, Smith street, the cbd, south melbourne,) are all much much better. Have fun wheels and if you need any other info let me know (although it's been a few years since I was there.)