The pass/fail grading system is an alternative to the traditional four-point grading system, in which an A translates to a 4, a B translates to a 3, and so on. With a pass/fail grade, grades of A through C (sometimes D, depending on the institution) are entered as a "pass" on a students transcript, and a grade of F (and sometimes D) is entered as a "fail." With this grading system, passing grades don't factor into a student's GPA; a student who receives As on his tests and papers receives the same grade as a student who receives Cs. Some institutions implement a similar optional grading system called credit/no entry, in which grades of A through C are entered as "credit," and lower grades are not entered on a transcript.
The pass/fail grading system allows students to explore interests outside their area of expertise without worrying about harming their GPA. It also allows students to devote more time on their major subjects, especially during midterms and final exams. With the pass/fail system, a pre-med student can elect to take a Russian language course that interests her, but only needs to study enough to receive a C.
Students who enroll in a course and elect a pass/fail grade take up spots in a course that could be occupied by more serious students. During midterms and finals in particular, pass/fail students often slack off or cut class, which is discouraging for the instructor and serious students in the course. Students simply don't try as hard and tend to lose interest when there is no pressure to excel.
Students who intend to apply for scholarships and pursue higher education should think twice before choosing the pass/fail grading system; pass/fail grades make no distinction between students who excel and average students, so a "pass" grade won't impress a selection committee. When hunting for jobs, however, a GPA isn't as important as a degree, and employers generally don't consider specific grades when making hiring decisions.