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Stem cells are a promising source for cell replacement therapy for several degenerative conditions. However, a number of limitations such as low cell survival, uncontrolled and/or low differentiation, induction of host immune response, and the risk of teratoma formation remain as challenges. In this review, we explore the utility of hydrogels as carriers for stem cell delivery and their potential to overcome some of the current limitations in stem cell therapy. We focus on in situ gelling hydrogels, and also discuss other strategies to modulate the immune response to promote controlled stem cell differentiation. Immunomodulatory hydrogels and gels designed to promote cell survival and integration into the host site will likely have a significant effect on enhancing the efficacy of stem cell transplantation as a therapy for debilitating degenerative diseases.