Stem cells execute self-renewing and asymmetric cell divisions in close association with stromal cells that form a niche. The mechanisms that link stromal cell signaling to self-renewal and asymmetry are only beginning to be identified, but Drosophila oogenic germline stem cells (GSCs) have emerged as an important model for studying stem cell niches. A member of the Bone Morphogenetic Protein (BMP) ligand family, Decapentaplegic (Dpp), sustains ovarian GSCs by suppressing differentiation in the stem cell niche (Figure 1A). Dpp overexpression expands the niche, blocks germ cell differentiation, and causes GSC hyperplasty. Here, we show that the bag-of-marbles (bam) differentiation factor is the principal target of Dpp signaling in GSCs; ectopic bam expression restores differentiation even when Dpp is overexpressed. We show that the transcriptional silencer element in the bam gene integrates Dpp control of bam expression. Finally and most significantly, we demonstrate for the first time that Dpp signaling regulates bam expression directly since the bam silencer element is a strong binding site for the Drosophila Smads, Mad and Medea. These studies provide a simple mechanistic explanation for how stromal cell signals regulate both the self-renewal and asymmetric fates of the products of stem cell division.