Mesenchymal stromal cells (MSCs) are a promising therapeutic option for multiple immune diseases/disorders; however, efficacy of MSC treatments can vary significantly. We present a novel licensing strategy to improve the immunosuppressive capacity of MSCs. Licensing murine MSCs with transforming growth factor-β1 (TGF-β MSCs) significantly improved their ability to modulate both the phenotype and secretome of inflammatory bone marrow-derived macrophages and significantly increased the numbers of regulatory T lymphocytes following co-culture assays. These TGF-β MSC-expanded regulatory T lymphocytes also expressed significantly higher levels of PD-L1 and CD73, indicating enhanced suppressive potential. Detailed analysis of T lymphocyte co-cultures revealed modulation of secreted factors, most notably elevated prostaglandin E2 (PGE2). Furthermore, TGF-β MSCs could significantly prolong rejection-free survival (69.2% acceptance rate compared to 21.4% for unlicensed MSC-treated recipients) in a murine corneal allograft model. Mechanistic studies revealed that (1) therapeutic efficacy of TGF-β MSCs is Smad2/3-dependent, (2) the enhanced immunosuppressive capacity of TGF-β MSCs is contact-dependent, and (3) enhanced secretion of PGE2 (via prostaglandin EP4 [E-type prostanoid 4] receptor) by TGF-β MSCs is the predominant mediator of Treg expansion and T cell activation and is associated with corneal allograft survival. Collectively, we provide compelling evidence for the use of TGF-β1 licensing as an unconventional strategy for enhancing MSC immunosuppressive capacity.