Programmed death-1 (PD-1) is a co-inhibitory receptor that suppresses T cell activation and is an important cancer immunotherapy target. Upon activation by its ligand PD-L1, PD-1 is thought to suppress signaling through the T cell receptor (TCR). Here, by titrating the strength of PD-1 signaling in both biochemical reconstitution systems and in T cells, we demonstrate that the coreceptor CD28 is strongly preferred over the TCR as a target for dephosphorylation by PD-1- recruited Shp2 phosphatase. We also show that PD-1 colocalizes with the costimulatory receptor CD28 in plasma membrane microclusters but partially segregates from the TCR. These results reveal that PD-1 suppresses T cell function primarily by inactivating CD28 signaling, suggesting that costimulatory pathways may play unexpected roles in regulating effector T cell function and therapeutic responses to anti-PD-L1/PD-1.