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Consider the normal curve (the "bell curve") . The mean (average) is determined as is the standard deviation. The mean plus and minus one standard deviation encompasses 67% of the data points (students with a grade). The mean plus and minus two standard deviations encompasses 95% of the data points. So, the 2.5% of students with the lowest scores on the test are labeled as failing. NU has about 170 in the class and thus 3-5 fail (more if the curve is skewed to the left, fewer if it is skewed to the right).