Peer effects are at the center of educational policy debatesregarding school choice, abilitygrouping, and instructionaldesign. Though emerging empirical evidence suggests thatpositive peer effects exist, less is known about how it affectsstudents with varying cognitive abilities. Using a nationallyrepresentative sample from China, we generated a student‐level measure of classroom composition of peers based oncognitive ability to understand the benefits or pitfalls ofplacing low‐ability students with heterogeneous or homoge-nous classmates. We conducted this analysis separately forgrades seven and nine students after controlling for studentbackground, family characteristics, and school endogeneity.We reaffirmed the overall positive—but small—peer effects onthe performance rankings. Low‐ability children scored muchlower than their counterparts when they studied in cogni-tively diverse classrooms. However, this effect negates theoverall positive impact of studying with high‐ability peers andthe pattern is consistent across rural and urban schools.