I just got back on the 1st from vacation in Madrid. We chose the cheapest most prime location of a hostel! I would totally recommend it as long as you are do not mind sharing a tiny bathroom with whoever else is staying there, and if you are on the street side, a noisy room on the weekends if you come in early!

But being young and adventerous I highly recommned Hostal Gislay to someone who is not picky, wants a great location( c/ carretas), and doesn't mind sharing a bathroom!

The woman who runs it is very very nice, we had a few great conversations with her! Although, she does not speak much English so this could become a problem for someone who does not speak the language at all.

http://www.spainhostels.com/links/links/frames.cgi?ID=607