Both stem cell self-renewal and lineage differentiation are controlled extrinsically as well as intrinsically. Germline stem cells (GSCs) in the Drosophila ovary provide an attractive model in which to study both stem cell self-renewal and lineage differentiation at the molecular and cellular level. Recently, we have proposed that escort cells (ECs) form a differentiation niche to control GSC lineage specification extrinsically. However, it remains poorly understood how the maintenance and function of the differentiation niche are regulated at the molecular level. Here, this study reveals a new role of COP9 in the differentiation niche to modulate autocrine Hedgehog (Hh) signaling, thereby promoting GSC lineage differentiation. COP9, which is a highly conserved protein complex composed of eight CSN subunits, catalyzes the removal of Nedd8 protein modification from target proteins. Our genetic results have demonstrated that all the COP9 components and the hh pathway components, including hh itself, are required in ECs to promote GSC progeny differentiation. Interestingly, COP9 is required in ECs to maintain Hh signaling activity, and activating Hh signaling in ECs can partially bypass the requirement for COP9 in GSC progeny differentiation. Finally, both COP9 and Hh signaling in ECs promote GSC progeny differentiation partly by preventing BMP signaling and maintaining cellular processes. Therefore, this study has demonstrated that the COP9-Hh signaling axis operates in the differentiation niche to promote GSC progeny differentiation partly by maintaining EC cellular processes and preventing BMP signaling. This provides new insight into how the function of the differentiation niche is regulated at the molecular level.