Astroglial pathology is seen in various neurodegenerative diseases including frontotemporal dementia (FTD), which can be caused by mutations in the gene encoding the microtubule-associated protein TAU (MAPT). Here, we applied a stem cell model of FTD to examine if FTD astrocytes carry an intrinsic propensity to degeneration and to determine if they can induce non-cell-autonomous effects in neighboring neurons. We utilized CRISPR/Cas9 genome editing in human induced pluripotent stem (iPS) cell-derived neural progenitor cells (NPCs) to repair the FTD-associated N279K MAPT mutation. While astrocytic differentiation was not impaired in FTD NPCs derived from one patient carrying the N279K MAPT mutation, FTD astrocytes appeared larger, expressed increased levels of 4R-TAU isoforms, demonstrated increased vulnerability to oxidative stress and elevated protein ubiquitination and exhibited disease-associated changes in transcriptome profiles when compared to astrocytes derived from one control individual and to the isogenic control. Interestingly, co-culture experiments with FTD astrocytes revealed increased oxidative stress and robust changes in whole genome expression in previously healthy neurons. Our study highlights the utility of iPS cell-derived NPCs to elucidate the role of astrocytes in the pathogenesis of FTD.