Type 1 diabetes (T1D) is an autoimmune disease caused by T cell-mediated destruction of insulin-producing β cells in the islets of Langerhans. In most cases, reversal of disease would require strategies combining islet cell replacement with immunotherapy that are currently available only for the most severely affected patients. Here, we demonstrate that immunotherapies that target T cell costimulatory pathways block the rejection of xenogeneic human embryonic-stem-cell-derived pancreatic endoderm (hESC-PE) in mice. The therapy allowed for long-term development of hESC-PE into islet-like structures capable of producing human insulin and maintaining normoglycemia. Moreover, short-term costimulation blockade led to robust immune tolerance that could be transferred independently of regulatory T cells. Importantly, costimulation blockade prevented the rejection of allogeneic hESC-PE by human PBMCs in a humanized model in vivo. These results support the clinical development of hESC-derived therapy, combined with tolerogenic treatments, as a sustainable alternative strategy for patients with T1D.