Multiple sclerosis (MS) is an inflammatory and demyelinating disease of the central nervous system (CNS) that results in variable severities of neurodegeneration. The understanding of MS has been limited by the inaccessibility of the affected cells and the lengthy timeframe of disease development. However, recent advances in stem cell technology have facilitated the bypassing of some of these challenges. Towards gaining a greater understanding of the innate potential of stem cells from people with varying degrees of disability, we generated induced pluripotent stem cells (iPSCs) from peripheral blood mononuclear cells derived from stable and progressive MS patients, and then further differentiated them into oligodendrocyte (OL) lineage cells. We analyzed differentiation under both homeostatic and inflammatory conditions via sustained exposure to low-dose interferon gamma (IFNγ), a prominent cytokine in MS. We found that all iPSC lines differentiated into mature myelinating OLs, but chronic exposure to IFNγ dramatically inhibited differentiation in both MS groups, particularly if exposure was initiated during the pre-progenitor stage. Low-dose IFNγ was not toxic but led to an early upregulation of interferon response genes in OPCs followed by an apparent redirection in lineage commitment from OL to a neuron-like phenotype in a significant portion of the treated cells. Our results reveal that a chronic low-grade inflammatory environment may have profound effects on the efficacy of regenerative therapies.