Summary The incompletely understood pathogenesis of pulmonary fibrosis (PF) and lack of reliable preclinical disease models have limited development of effective therapies. An emerging literature now implicates alveolar epithelial type 2 cell (AEC2) dysfunction as an initiating pathogenic event in the onset of a variety of PF syndromes, including adult idiopathic pulmonary fibrosis (IPF) and childhood interstitial lung disease (chILD). However, inability to access primary AEC2s from patients, particularly at early disease stages, has impeded identification of disease-initiating mechanisms. Here we present an in vitro reductionist model system that permits investigation of epithelial-intrinsic events that lead to AEC2 dysfunction over time using patient-derived cells that carry a disease-associated variant, SFTPC I73T , known to be expressed solely in AEC2s. After generating patient-specific induced pluripotent stem cells (iPSCs) and engineering their gene-edited (corrected) counterparts, we employ directed differentiation to produce pure populations of syngeneic corrected and mutant AEC2s, which we expand >10 15 fold in vitro , providing a renewable source of cells for modeling disease onset. We find that mutant iPSC-derived AEC2s (iAEC2s) accumulate large amounts of misprocessed pro-SFTPC protein which mistrafficks to the plasma membrane, similar to changes observed in vivo in the donor patient’s AEC2s. These changes result in marked reduction in AEC2 progenitor capacity and several downstream perturbations in AEC2 proteostatic and bioenergetic programs, including a late block in autophagic flux, accumulation of dysfunctional mitochondria with consequent time-dependent metabolic reprograming from oxidative phosphorylation to glycolysis, and activation of an NF-κB dependent inflammatory response. Treatment of SFTPC I73T expressing iAEC2s with hydroxychloroquine, a medication commonly prescribed to these patients, results in aggravation of autophagy perturbations and metabolic reprogramming. Thus, iAEC2s provide a patientspecific preclinical platform for modeling the intrinsic epithelial dysfunction associated with the inception of interstitial lung disease.