I have sheets that document every maneuver and subject area covered, how much time we took, date, location, yadda yadda. After the lesson, the student and I both sign (they acknowledge that they received the instruction and I acknowledge that I gave it - I also sign their logbook...as it were). I put a copy of that form in a folder dated month and year.
Folders are put current month up front in a filing cabinet. Once I'm at 5 years, the folder in the back will get tossed and I'll have a rolling 5 year file. This exceeds the FAA's requirements.
That's also where the copy of their birth certificate and/or passport goes as well as a copy of my annual TSA "Training" certificate and the completion certificate from my FIRC. I also put student 8710s in there (copies of them) and I higlight the date in yellow if they passed and red if they failed. I do the same with the knowledge exam endorsement forms that I have.
Works pretty well. Takes up a lot of space, but I use the file cabinet for other things too. I was doing 1 folder per student for a while, but decided against that about a year ago.
Should make the feds happy if they come asking what's up. I was going to keep the individual student folders indefinitely, but I have no desire to keep that much paperwork around. I got over it when I had training evaluations and 8410s from 135 training/checking events that I decided I wanted to keep. Those seem to pile up quickly.