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Careful not to create a wrong incentive where universities just churn people through a program that slowly becomes impossible to fail.

Compared to the existing programs where teachers are pressured to pass people because you can't just fail 70% of the students because it makes the passing rate too low for your school?

These two problems are not exclusive.

Neither approach sounds better. :(

Hmmm, that seems like it would lead to perverse incentives too. eg:

"They spelled their name mostly correctly. Clearly they pass."

"Incentivize to pass" the institution that makes and grades the tests - what effect do you think that will have?

It would be like today where some public universities with tight budgets that will do pretty much anything to keep international students who pay top dollar.