N-methyl-D-aspartate receptors (NMDARs) are glutamate-gated ion channels that are critical to the regulation of excitatory synaptic function in the CNS. NMDARs govern experience-dependent synaptic plasticity and have been implicated in the pathophysiology of various neuropsychiatric disorders including the cognitive deficits of schizophrenia and certain forms of autism. Certain neurosteroids modulate NMDARs experimentally but their low potency, poor selectivity, and very low brain concentrations make them poor candidates as endogenous ligands or therapeutic agents. Here we show that the major brain-derived cholesterol metabolite 24(S)-hydroxycholesterol (24(S)-HC) is a very potent, direct, and selective positive allosteric modulator of NMDARs with a mechanism that does not overlap that of other allosteric modulators. At submicromolar concentrations 24(S)-HC potentiates NMDAR-mediated EPSCs in rat hippocampal neurons but fails to affect AMPAR or GABAA receptors (GABAARs)-mediated responses. Cholesterol itself and other naturally occurring oxysterols present in brain do not modulate NMDARs at concentrations ≤10 μM. In hippocampal slices, 24(S)-HC enhances the ability of subthreshold stimuli to induce long-term potentiation (LTP). 24(S)-HC also reverses hippocampal LTP deficits induced by the NMDAR channel blocker ketamine. Finally, we show that synthetic drug-like derivatives of 24(S)-HC, which potently enhance NMDAR-mediated EPSCs and LTP, restore behavioral and cognitive deficits in rodents treated with NMDAR channel blockers. Thus, 24(S)-HC may function as an endogenous modulator of NMDARs acting at a novel oxysterol modulatory site that also represents a target for therapeutic drug development.