Peer interaction offers critical learning opportunities for preschool students, yet exposure to peers of different skill levels varies within and across classrooms. We explore two ways peers may affect learning: differences in who children play with in a classroom and differences in student composition across classrooms. We find that playing with higher-skilled students within one's classroom is not associated with greater achievement gains, nor is the average incoming literacy level of a classroom. However, higher concentrations of students entering preschool with the lowest literacy skills is negatively associated with gains in those classrooms. The findings shed light on mechanisms of learning in early childhood settings and have implications for preschool programming broadly. [This is the online first version of an article published in "American Educational Research Journal."]