Encapsulating cells in biodegradable hydrogels offers numerous attractive features for tissue engineering, including ease of handling, a highly hydrated tissue-like environment for cell and tissue growth, and the ability to form in vivo. Many properties important to the design of a hydrogel scaffold, such as swelling, mechanical properties, degradation, and diffusion, are closely linked to the crosslinked structure of the hydrogel, which is controlled through a variety of different processing conditions. Degradation may be tuned by incorporating hydrolytically or enzymatically labile segments into the hydrogel or by using natural biopolymers that are susceptible to enzymatic degradation. Because cells are present during the gelation process, the number of suitable chemistries and formulations are limited. In this review, we describe important considerations for designing biodegradable hydrogels for cell encapsulation and highlight recent advances in material design and their applications in tissue engineering.