This study has investigated the question of relation between literacy practices in and out of school in rural Tanzania. By using the perspective of linguistic anthropology, literacy practices in five villages in Karagwe district in the northwest of Tanzania have been analysed. The outcome may be used as a basis for educational planning and literacy programs. The analysis has revealed an intimate relation between language, literacy and power. In Karagwe, traditional élites have drawn on literacy to construct and reconstruct their authority, while new élites, such as individual women and some young people have been able to use literacy as one tool to get access to power. The study has also revealed a high level of bilingualism and a high emphasis on education in the area, which prove a potential for future education in the area. At the same time discontinuity in language use, mainly caused by stigmatisation of what is perceived as local and traditional, such as the mother-tongue of the majority of the children, and the high status accrued to all that is perceived as Western, has turned out to constitute a great obstacle for pupils’ learning. The use of ethnographic perspectives has enabled comparisons between interactional patterns in schools and outside school. This has revealed communicative patterns in school that hinder pupils’ learning, while the same patterns in other discourses reinforce learning. By using ethnography, relations between explicit and implicit language ideologies and their impact in educational contexts may be revealed. This knowledge may then be used to make educational plans and literacy programmes more relevant and efficient, not only in poor post-colonial settings such as Tanzania, but also elsewhere, such as in Western settings.