The Skill/Level Category drop-down value is used to group or classify your Student Skills/Levels. The Skill/Level Category is assigned to each Skill/Level you create and is a search criteria option available in the Student Skills/Levels Search.
You can edit the Skill Category assigned to a Skill/Level from the Classes menu > Skills > Manage Skills/Levels.
Skill/Level Category drop-down values can be added from the Gear icon > Settings > General > Drop-down Lists (left menu) > Student (section) > Skill/Level Category.