Tissue homeostasis is maintained by balancing stem cell self-renewal and differentiation. How surrounding cells support this process has not been entirely resolved. Here we show that the chromatin and telomere-binding factor Without children (Woc) is required for maintaining the association of escort cells (ECs) with germ cells in adult ovaries. This tight association is essential for germline stem cell (GSC) differentiation into cysts. Woc is also required in larval ovaries for the association of intermingled cells (ICs) with primordial germ cells. Reduction in the levels of two other proteins, Stat92E and its target Zfh1, produce phenotypes similar to woc in both larval and adult ovaries, suggesting a molecular connection between these three proteins. Antibody staining and RT-qPCR demonstrate that Zfh1 levels are increased in somatic cells that contact germ cells, and that Woc is required for a Stat92E-mediated upregulation of zfh1 transcription. Our results further demonstrate that overexpression of Zfh1 in ECs can rescue GSC differentiation in woc-deficient ovaries. Thus, Zfh1 is a major Woc target in ECs. Stat signalling in niche cells has been previously shown to maintain GSCs non-autonomously. We now show that Stat92E also promotes GSC differentiation. Our results highlight the Woc-Stat-Zfh1 module as promoting somatic encapsulation of germ cells throughout their development. Each somatic cell type can then provide the germline with the support it requires at that particular stage. Stat is thus a permissive factor, which explains its apparently opposite roles in GSC maintenance and differentiation.