Cell fate transitions depend on balanced rewiring of transcription and translation programs to mediate ordered developmental progression. Components of the nonsense-mediated mRNA decay (NMD) pathway have been implicated in regulating embryonic stem cell (ESC) differentiation, but the exact mechanism is unclear. Here we show that NMD controls expression levels of the translation initiation factor Eif4a2 and its premature termination codon-encoding isoform (Eif4a2^PTC). NMD deficiency leads to translation of the truncated eIF4A2^PTC protein. eIF4A2^PTC elicits increased mTORC1 activity and translation rates and causes differentiation delays. This establishes a previously unknown feedback loop between NMD and translation initiation. Furthermore, our results show a clear hierarchy in the severity of target deregulation and differentiation phenotypes between NMD effector KOs (Smg5 KO > Smg6 KO > Smg7 KO), which highlights heterodimer-independent functions for SMG5 and SMG7. Together, our findings expose an intricate link between mRNA homeostasis and mTORC1 activity that must be maintained for normal dynamics of cell state transitions.