Abstract Cranial neural crest cell (CNCC)-derived osteochondroprogenitors commit to either bone or cartilage by fine-tuning master transcription factors. However, it remains unclear how extracellular cues regulate this critical cell fate decision. Here, we show that loss of VPS25, an ESCRT-II subunit required for lysosomal degradation of activated membrane receptors, impairs ossification in mouse embryos and CNCC-derived cells. VPS25 loss reduces osteogenesis, while upregulating early and late chondrogenic markers in vitro, even under cell culture osteogenic induction. In Vps25 mutant mice, the shift toward cartilage at the expense of bone precedes early chondrogenesis, indicating skewed osteochondroprogenitor fate. Mechanistically, VPS25 loss causes endosomal accumulation of activated insulin-like growth factor 1 receptor (IGF1R) in mutant murine cells and in fibroblasts from patients with biallelic VPS25 variants associated with a fatal congenital developmental syndrome. Pharmacological IGF1R inhibition rescues lineage identity in mutant craniofacial skeletal tissues in vivo and in mutant cultured cells. These findings reveal a previously unrecognized role for ESCRT-II in controlling skeletal fate through IGF signaling, providing new mechanistic insight into skeletal cell fate determination and pointing to IGF1R modulation as a potential avenue for mitigating human craniofacial abnormalities.