Vaxjo municipality education officials said the teacher, whose name was not released, told his students he would pay them each $14.85 if they passed the exam, but they would each have to pay him $29.75 if they failed, The Local reported Friday.
Of the four students who accepted the bet, one passed, one failed, one was absent due to illness and one never turned in the exam.
"I wanted to be fair and honest and give my teacher 200 kronor ($29.75) seeing as I failed the test," the student who failed said.
The student said he believes the school board is "overreacting" to the incident.
The teacher said he regrets making the bet, which he described as an incentive to help students raise their test scores amid pressure from the school board.
Michael Fardigh, the municipality's personnel manager, said the teacher is likely to be dismissed.
"It is a question of taking advantage of a person who is dependent on you. To make them hand over money for not passing a test is highly inappropriate behavior," he said.