The use of iPSC derived brain organoid models to study neurodegenerative disease has been hampered by a lack of systems that accurately and expeditiously recapitulate pathogenesis in the context of neuron-glial interactions. Here we report development of a system, termed AstTau, which propagates toxic human tau oligomers in iPSC derived neuron-astrocyte assembloids. The AstTau system develops much of the neuronal and astrocytic pathology observed in tauopathies including misfolded, phosphorylated, oligomeric, and fibrillar tau, strong neurodegeneration, and reactive astrogliosis. Single cell transcriptomic profiling combined with immunochemistry characterizes a model system that can more closely recapitulate late-stage changes in adult neurodegeneration. The transcriptomic studies demonstrate striking changes in neuroinflammatory and heat shock protein (HSP) chaperone systems in the disease process. Treatment with the HSP90 inhibitor PU-H71 is used to address the putative dysfunctional HSP chaperone system and produces a strong reduction of pathology and neurodegeneration, highlighting the potential of AstTau as a rapid and reproducible tool for drug discovery.