High school dropout rates among Mexican Americans decline markedly between the first and second immigrant generations and, consequently, move closer to non‐Hispanic white levels. However, the third generation makes little progress in closing the remaining gap with whites despite their parents having more schooling on average than those of the second generation. Utilizing 2007–2013 Current Population Survey data, we examine whether an inter‐generational shift away from two‐parent families contributes to this educational stagnation. We also consider the effect of changes in sibship size. The analysis involves performing a partial regression decomposition of differences between second‐ and third‐generation Mexican‐American adolescents (aged 16–17 years) in the likelihood of having dropped out. We find that Mexican third‐generation teens are close to nine percentage points less likely than second‐generation peers to live with two parents. The decomposition results suggest that this change in family structure offsets a substantial portion of the negative influence of rising parental education on third‐generation dropout risk.