Although bile duct disorders are well-recognized causes of liver disease, the molecular and cellular events leading to biliary dysfunction are poorly understood. To enable modeling and drug discovery for biliary disease, we describe a protocol that achieves efficient differentiation of biliary epithelial cells (cholangiocytes) from human pluripotent stem cells (hPSCs) through delivery of developmentally relevant cues, including NOTCH signaling. Using three-dimensional culture, the protocol yields cystic and/or ductal structures that express mature biliary markers, including apical sodium-dependent bile acid transporter, secretin receptor, cilia and cystic fibrosis transmembrane conductance regulator (CFTR). We demonstrate that hPSC-derived cholangiocytes possess epithelial functions, including rhodamine efflux and CFTR-mediated fluid secretion. Furthermore, we show that functionally impaired hPSC-derived cholangiocytes from cystic fibrosis patients are rescued by CFTR correctors. These findings demonstrate that mature cholangiocytes can be differentiated from hPSCs and used for studies of biliary development and disease.