We had a discussion about this yesterday and discovered a good situation for inflating a student's level. The story was about a woman who claimed that she knew that she was a level 9, but turned out she was more like a level 6. I said it was ok to just go ahead and inflate her to a level 10. That would make her feel better and let future instructors have a better indication of her true skills.
I make an effort to tell students what skills they should have before they go to the next level and let them make their own assessment.