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This paper uses administrative longitudinal micro data on about 100,000 Uruguayan students in public non-vocational Junior High school (grades 7-9) to identify the causal effect of grade failure on students' subsequent school outcomes. Exploiting the discontinuity in promotion rates induced by a rule that establishes that a pupil missing more than 25 days during the school year will automatically fail that grade I show that grade failure leads to substantial drop out and lower educational attainment after 4 to 5 years since the time when failure first occurred. Complementary evidence based on a change in the regime of grade promotion provides additional support for this conclusion.