Three Prime Repair Exonuclease 1 (TREX1) gene mutations have been associated with Aicardi-Goutières Syndrome (AGS) - a rare, severe pediatric autoimmune disorder that primarily affects the brain and has a poorly understood etiology. Microglia are brain-resident macrophages indispensable for brain development and implicated in multiple neuroinflammatory diseases. However, the role of TREX1 - a DNase that cleaves cytosolic nucleic acids, preventing viral- and autoimmune-related inflammatory responses - in microglia biology remains to be elucidated. Here, we leverage a model of human embryonic stem cell (hESC)-derived engineered microglia-like cells, bulk, and single-cell transcriptomics, optical and transmission electron microscopy, and three-month-old assembloids composed of microglia and oligodendrocyte-containing organoids to interrogate TREX1 functions in human microglia. Our analyses suggest that TREX1 influences cholesterol metabolism, leading to an active microglial morphology with increased phagocytosis in the absence of TREX1. Notably, regulating cholesterol metabolism with an HMG-CoA reductase inhibitor, FDA-approved atorvastatin, rescues these microglial phenotypes. Functionally, TREX1 in microglia is necessary for the transition from gliogenic intermediate progenitors known as pre-oligodendrocyte precursor cells (pre-OPCs) to precursors of the oligodendrocyte lineage known as OPCs, impairing oligodendrogenesis in favor of astrogliogenesis in human assembloids. Together, these results suggest routes for therapeutic intervention in pathologies such as AGS based on microglia-specific molecular and cellular mechanisms.