This study reports on a self-paced reading experiment in which native and non-native speakers of English read sentences designed to evaluate the predictions of usage-based and rule-based approaches to second language acquisition (SLA). Critical stimuli were four-word sequences embedded into sentences in which phrase frequency and grammaticality were crossed in order to examine whether grammatical processing is modulated by phrase frequency. The magnitude of grammaticality effects for native speakers did not differ by phrase frequency, indicating that phrase frequency does not modulate native grammatical processing. Phrase frequency did, however, modulate the magnitude of non-native grammaticality effects. This modulating effect of phrase frequency on grammatical processing for non-native speakers depended on proficiency, showing a u-shaped change in the size of grammaticality effects relative to speaker proficiency. The overall pattern of change in grammaticality effects suggests a gradual developmental shift in grammatical processing from an initial reliance on phrase frequency to an eventual abstraction of generalizable rules from the linguistic input once sufficient experience has accumulated. Results suggest that second language (L2) grammatical development relies on a combination of both usage-based and rule-based knowledge and processing, rather than exclusive reliance on one or the other.