Classroom settings bring to light many differences between children—differences that children notice and attempt to explain. Here, we advance theory on the psychological processes underlying how children explain the differences they observe in the classroom. Integrating evidence from cognitive, social, cultural, developmental, and educational psychology, we propose that young children tend to explain differences among their peers by appealing to the inherent characteristics of those individuals and, conversely, tend to overlook extrinsic reasons for such differences—that is, reasons having to do with external circumstances and structural factors. We then outline how this inherence bias in children’s explanations affects their motivation and performance in school, exacerbating inequalities in achievement and making these inequalities seem legitimate. We conclude by suggesting several means of counteracting the inherence bias in children’s explanations and its effects on their educational outcomes. Throughout, we highlight new directions for research on the relation between children’s explanations, their motivation and achievement, and the inequalities observed in elementary school and beyond.