In some developing countries as well as developed countries, students are promoted from one grade to the next based on their academic performance (policy of grade retention). An alternative education policy is to impose restrictions on retention or to automatically promote all students, regardless of academic achievement, from one grade to the next (education policy of social promotion). Although different policies are present in different countries, there is no consensus about the advantages and disadvantages of grade retention in economics literature. Questions for example, do students that fail and repeat a grade lose motivation and give up on their academics? Or are they more likely to drop-out of school? Offer contradicting responses for different countries and hence, problem matter become more context specific. In our setting, differences in schooling attainment can result from differences in cost or from differences in returns. With the help of simplifying assumptions on benefits and costs of education, we are able to show that under grade retention policy, we see higher dropout rates when compared with that under social promotion policy. Another important result of our analysis suggests that grade retention policy does fairly well for highly able students in the class to perform better.