Ah! Then they haven't passed the class. They have fallen behind, due to a lack of a good education or underpaid and overworked teachers who do not have suficient time, or proper training, to deal with students who need more attention. Some may call that a "failure of the school system".

I found a discussion about it at Wordreference.com: http://forum.wordreference.com/showthread.php?t=55680 Although "school failure" is a literal translation, it does not sound right. I am still not sure about what you are referencing. Dropping out of school? The failure of the schools to prepare students for college? Kids failing and having to repeat a grade? Can you be more specific about what fracaso escolar means to you?