Interleukin-27 (IL-27) is an immunoregulatory cytokine whose essential function is to limit immune responses. We found that the gene encoding cholesterol 25-hydroxylase (Ch25h) was induced in CD4+ T cells by IL-27, enhanced by transforming growth factor–β (TGF-β), and antagonized by T-bet. Ch25h catalyzes cholesterol to generate 25-hydroxycholesterol (25OHC), which was subsequently released to the cellular milieu, functioning as a modulator of T cell response. Extracellular 25OHC suppressed cholesterol biosynthesis in T cells, inhibited cell growth, and induced nutrient deprivation cell death without releasing high-mobility group box 1 (HMGB1). This growth inhibitory effect was specific to actively proliferating cells with high cholesterol demand and was reversed when extracellular cholesterol was replenished. Ch25h-expressing CD4+ T cells that received IL-27 and TGF-β signals became refractory to 25OHC-mediated growth inhibition in vitro. Nonetheless, IL-27–treated T cells negatively affected viability of bystander cells in a paracrine manner, but only if the bystander cells were in the early phases of activation. In mouse models of skin inflammation due to autoreactive T cells or chemically induced hypersensitivity, genetic deletion of Ch25h or Il27ra led to worse outcomes. Thus, Ch25h is an immunoregulatory metabolic switch induced by IL-27 and dampens excess bystander T effector expansion in tissues through its metabolite derivative, 25OHC. This study reveals regulation of cholesterol metabolism as a modality for controlling tissue inflammation and thus represents a mechanism underlying T cell immunoregulatory functions.