The TET family of 5-methylcytosine (5mC) dioxygenases plays critical roles in development by modifying DNA methylation. Using CRISPR, we inactivated the TET1 gene in H9 human embryonic stem cells (hESCs). Mutant H9 hESCs remained pluripotent, even though the level of hydroxymethylcytosine (5hmC) decreased to 30% of that in wild-type cells. Neural differentiation induced by dual SMAD inhibitors was not significantly affected by loss of TET1 activity. However, in a morphogen-free condition, TET1 deficiency significantly reduced the generation of NESTIN+SOX1+ neuroectoderm cells from 70% in wild-type cells to 20% in mutant cells. This was accompanied by a 20-fold reduction in the expression level of PAX6 and a significant decrease in the amount of 5hmC on the PAX6 promoter. Overexpression of the TET1 catalytic domain in TET1-deficient hESCs significantly increased 5hmC levels and elevated PAX6 expression during differentiation. Consistent with these in vitro data, PAX6 expression was significantly decreased in teratomas formed by TET1-deficient hESCs. However, TET1 deficiency did not prevent the formation of neural tube-like structures in teratomas. Our results suggest that TET1 deficiency impairs the intrinsic ability of hESCs to differentiate to neuroectoderm, presumably by decreasing the expression of PAX6, a key regulator in the development of human neuroectoderm.