Give the student a few different topics to choose from. Let the student have a few moments to prepare, and then engage him in a five to ten minute conversation on the subject. Assign a point based system from zero to five, with zero indicating no proficiency and five indicating native speaking skills, to assess levels in four areas.
Test for pronunciation. It's okay to make allowances for an accent, but the goal is comprehensibility.
Test for comprehension. To test high, the student must be able to fully understand your replies and questions.
Assess fluency. This includes both the size of vocabulary used by the student and the speed and ease at which questions were answered.
Evaluate clarity. Both grammar and content fall under this category. Look for sufficiency of information -- short answers may be fluent and clear, but if important information is left out, clarity ratings will be lower. Likewise, proper grammar is important for creating a clear message.
Add up the total points to decide which level best fits the student.