Type 2 diabetes results from defects in both insulin sensitivity and insulin secretion. Elevated cholesterol content within pancreatic β-cells has been shown to reduce β-cell function and increase β-cell apoptosis. Hyperglycemia and dyslipidemia contribute to glucolipotoxicity that leads to type 2 diabetes. Here we examined the capacity of glucolipotoxicity to induce free cholesterol accumulation in human pancreatic islets and the INS-1 insulinoma cell line. Glucolipotoxicity treatment increased free cholesterol in β-cells, which was accompanied by increased reactive oxygen species (ROS) production and decreased insulin secretion. Addition of AAPH, a free radical generator, was able to increase filipin staining indicating a link between ROS production and increased cholesterol in β-cells. We also showed the ability of stigmasterol, a common food-derived phytosterol with anti-atherosclerotic potential, to prevent the increase in both free cholesterol and ROS levels induced by glucolipotoxicity in INS-1 cells. Stigmasterol addition also inhibited early apoptosis, increased total insulin, promoted actin reorganization, and improved insulin secretion in cells exposed to glucolipotoxicity. Overall, these data indicate cholesterol accumulation as an underlying mechanism for glucolipotoxicity-induced defects in insulin secretion and stigmasterol treatment as a potential strategy to protect β-cell function during diabetes progression.