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Medical Education 2011:45: 867–877 OBJECTIVES  Many medical schools are currently undergoing curriculum reform. When considering the means by which students will be evaluated in a revised curriculum, the need to reduce the prevalences of depression and anxiety associated with academic stress must be weighed against the importance of academic outcomes. Pass/fail evaluation, as compared with tiered grading, is commonly presented as a means to adequately assess student performance while minimising stress and anxiety. The purpose of this literature review was to determine the impact of pass/fail grading on medical student well‐being and academic outcomes. METHODS  A systematic search was performed of the available literature published between January 1980 and August 2010, using the PubMed, Ovid Medline, Ovid PsycINFO and ERIC databases. Eligible papers assessed the impact of pass/fail grading on medical student well‐being, academic outcomes or both. Academic outcomes included but were not limited to objective measures, such as performance on the US Medical Licensing Examination, and subjective measures, such as student desirability by residency programmes. Reference lists in identified papers were searched and all identified papers were run through a citation index. RESULTS  Four papers met the inclusion criteria for both well‐being and academic outcomes. An additional five papers met the inclusion criteria for academic outcomes only. The four papers that focused on well‐being reported improvement in specified areas. No significant difference was identified in any of the five papers examining objective academic outcomes or in those papers that examined the quality of residency programmes attained. Results from two studies suggested that some programme directors believe pass/fail grading creates disadvantages for students in attaining a residency, whereas a third study yielded mixed results about its impact on residency attainment. CONCLUSIONS  Student well‐being is enhanced and objective academic performance is not adversely affected by a pass/fail evaluation system, but students’ ability to obtain a desired residency programme may be hindered by individual programme directors’ preferences for tiered grading systems. There is an overall paucity of literature on this topic and additional study is needed.