Difficulties in phonological processing in illiterates have been attributed to their limited phonological awareness, a consequence of their lack of literacy. We sought to explore the potential influence of education on auditory lexical processing above and beyond literacy per se. In order to achieve this goal, we compared a lexical decision making paradigm with a repetition paradigm using words and pseudo-words. We based this choice of tasks on previous research, which has shown that pseudo-word repetition is dependent on the phonological loop; such studies have thus demonstrated a literacy effect on repetition. Instead, lexical decision making is known to depend on the size of one's vocabulary, which is influenced by the level of education attained. Our sample comprised three groups: illiterate no education, literate/low education and literate/high education, individuals. The pattern of our findings confirmed that literacy has an effect on the capacity of the phonological loop, as our illiterate group alone had difficulty with repetition, as compared with both literate/educated groups. Also, our findings suggested an education effect on lexical decision making, as we found a gradation in the performance of the three groups. Therefore, we succeeded in dissecting the effect of literacy and education on auditory lexical processing through the application and comparison of two simple paradigms.