Diabetic kidney disease (DKD) remains the most common cause of end-stage kidney disease despite multifactorial intervention. We demonstrated that increased cholesterol in association with downregulation of ATP-binding cassette transporter ABCA1 occurs in normal human podocytes exposed to the sera of patients with type 1 diabetes and albuminuria (DKD(+)) when compared with diabetic patients with normoalbuminuria (DKD(-)) and similar duration of diabetes and lipid profile. Glomerular downregulation of ABCA1 was confirmed in biopsies from patients with early DKD (n = 70) when compared with normal living donors (n = 32). Induction of cholesterol efflux with cyclodextrin (CD) but not inhibition of cholesterol synthesis with simvastatin prevented podocyte injury observed in vitro after exposure to patient sera. Subcutaneous administration of CD to diabetic BTBR (black and tan, brachiuric) ob/ob mice was safe and reduced albuminuria, mesangial expansion, kidney weight, and cortical cholesterol content. This was followed by an improvement of fasting insulin, blood glucose, body weight, and glucose tolerance in vivo and improved glucose-stimulated insulin release in human islets in vitro. Our data suggest that impaired reverse cholesterol transport characterizes clinical and experimental DKD and negatively influences podocyte function. Treatment with CD is safe and effective in preserving podocyte function in vitro and in vivo and may improve the metabolic control of diabetes.