Proteins that control the excitability of neurons, including voltage-dependent ion channels and neurotransmitter receptors, reside in a membrane lipid environment that includes sphingomyelin, but the influence of the metabolism of this lipid on excitability is unknown. Sphingomyelin in the plasma membrane can be cleaved by neutral sphingomyelinases (nSMase) to generate ceramides and sphingosine-1-phosphate (S1P) which have been shown to play a variety of roles in cellular signaling processes. We found that application of nSMase to hippocampal slices results in a selective enhancement in the population spike amplitude, resulting in fEPSP-PS potentiation of the CA3-CA1 schaeffer collateral synapse. Single cell recordings showed that nSMase activity increases action potential frequency in CA1 neurons in a reversible manner. Additional current clamp recordings showed that nSMase reduces the slow after-hyperpolarization after a burst of action potentials. Mass spectrometry-based measurements demonstrated that nSMase activity induces a rapid increase in the levels of ceramides and S1P in cells in hippocampal slices. The ability of nSMase to increase CA1 neuron excitability was blocked by an inhibitor of sphingosine kinase, the enzyme that converts ceramide to S1P. Moreover, direct intracellular application of S1P to CA1 neurons increased action potential firing. Our findings suggest roles for sphingomyelin metabolism and S1P in the positive regulation of the excitability of hippocampal neurons.