The highly sulfated glycosaminoglycan (GAG) heparin is widely used in the clinic as an anticoagulant, and researchers are now using it to enhance stem cell expansion/differentiation protocols, as well as to improve the delivery of growth factors for tissue engineering (TE) strategies. Growth differentiation factor 5 (GDF5) belongs to the bone morphogenetic protein family of proteins and is vital for skeletal formation; however, its interaction with heparin and heparan sulfate (HS) has not been studied. We identify GDF5 as a novel heparin/HS binding protein and show that HS proteoglycans are vital in localizing GDF5 to the cell surface. Clinically relevant doses of heparin (10nM), but not equivalent concentrations of HS, were found to inhibit GDF5's biological activity in both human mesenchymal stem/stromal cell-derived chondrocyte pellet cultures and the skeletal cell line ATDC5. We also found that heparin inhibited both GDF5 binding to cell surface HS and GDF5-induced induction of Smad 1/5/8 signaling. Furthermore, GDF5 significantly increased aggrecan gene expression in chondrocyte pellet cultures, without affecting collagen type X expression, making it a promising target for the TE of articular cartilage. Importantly, this study may explain the variable (and disappointing) results seen with heparin-loaded biomaterials for skeletal TE and the adverse skeletal effects reported in the clinic following long-term heparin treatment. Our results caution the use of heparin in the clinic and in TE applications, and prompt the transition to using more specific GAGs (e.g., HS derivatives), with better-defined structures and fewer off-target effects.