Intestinal mesenchymal cells play essential roles in epithelial homeostasis, matrix remodeling, immunity, and inflammation. But the extent of heterogeneity within the colonic mesenchyme in these processes remains unknown. Using unbiased single-cell profiling of over 16,500 colonic mesenchymal cells, we reveal four subsets of fibroblasts expressing divergent transcriptional regulators and functional pathways, in addition to pericytes and myofibroblasts. We identified a niche population located in proximity to epithelial crypts expressing SOX6, F3 (CD142), and WNT genes essential for colonic epithelial stem cell function. In colitis, we observed dysregulation of this niche and emergence of an activated mesenchymal population. This subset expressed TNF superfamily member 14 (TNFSF14), fibroblastic reticular cell-associated genes, IL-33, and Lysyl oxidases. Further, it induced factors that impaired epithelial proliferation and maturation and contributed to oxidative stress and disease severity in vivo. Our work defines how the colonic mesenchyme remodels to fuel inflammation and barrier dysfunction in IBD.