To maintain financial aid, the student usually must finish at least 85% of credits taken.
If he he is less than full-time, does he lose aid or housing? What is full-time status for aid at his school?
If there is no mental health issue you are almost in a worse position. No medical leave possible with grades erased, no tuition refund insurance payout, no accommodations etc. Probabation is possible as is loss of aid.
Was he a hard worker in high school? Do you think the so far failed classes are a result of him not working or are they really hard weeder classes? Are you positive there is no mental health issue? How likely is it he will pull the rabbit out of the hat and do well in midterms after not working during the last few weeks?
Worst case scenario, he fails the midterms and/or has to withdraw. Understand that if he ends up withdrawing, not only do you lose that tuition money but you may have to pay BACK the financial aid received. Seriously,
The priority is to find out what is going on and have a good conversation with your son.
But you also need a dean or administrator to fill you in on consequences of various scenarios.
Full disclosure, I once took a kid out and that kid worked for a few years and is now almost a senior in a continuing education program at a great college. I second guess that decision as much as thingamajig questions her family’s opposite one. So there is no right answer over time. But really there is no wrong answer either 
As others have said, be aware of the consequences- in terms of transcript and in terms of finances- of any classes dropped or withdrawn from, and of withdrawing from the school at different points in time. Make sure your son is aware of these. Discuss options with a dean. Then you have to either gamble on your son, or not.
I think your gut is probably right. But you are going to have to convince your son to leave because of potential dire consequences that he doesn’t see at all. Apparently he thinks all is fine and is having fun. So if you go that route- you will need a college dean or advisor or whomever to help you talk to your son. Otherwise, while you are saving his life to to speak, he willl always accuse you of ruining it.