Although telomeres are heterochromatic, they are transcribed into noncoding telomeric repeat-containing RNA (TERRA). Here we show that RNA-DNA hybrids form at telomeres and are removed by RNase H enzymes in the budding yeast, Saccharomyces cerevisiae. In recombination-competent telomerase mutants, telomeric RNA-DNA hybrids promote recombination-mediated elongation events that delay the onset of cellular senescence. Reduction of TERRA and telomeric RNA-DNA-hybrid levels diminishes rates of recombination-mediated telomere elongation in cis. Overexpression of RNase H decreases telomere recombination rates and accelerates senescence in recombination-competent but not recombination-deficient cells. In contrast, in the absence of both telomerase and homologous recombination, accumulation of telomeric RNA-DNA hybrids leads to telomere loss and accelerated rates of cellular senescence. Therefore, the regulation of TERRA transcription and telomeric RNA-DNA-hybrid formation are important determinants of both telomere-length dynamics and proliferative potential after the inactivation of telomerase.