Agonists of the α7 nicotinic acetylcholine receptor (α7 nAChR) have entered clinical trials as pro-cognitive agents for treating schizophrenia and Alzheimer's disease. The most advanced compounds are orthosteric agonists which occupy the ligand binding site. At the molecular level, agonist activation of α7 nAChRs is reasonably well understood. However, the consequences of activating α7 nAChRs on neural circuits underlying cognition remain elusive. Here we report that an α7 nAChR agonist (FRM-17848) enhances long-term potentiation (LTP) in rat septo-hippocampal slices far below the cellular EC50, but at a concentration that coincides with multiple functional outcome measures as we reported in Stoiljkovic et al. In this same concentration range, we observed a significant increase in spontaneous gamma-aminobutyric acid (GABA) inhibitory postsynaptic currents and a moderate suppression of excitability in whole-cell recordings from rat CA1 pyramidal neurons. This modulation of GABAergic activity is necessary for the LTP-enhancing effects of FRM-17848, since inhibiting GABAA α5 subunit-containing receptors fully reversed the effects of the α7 nAChR agonist. These data suggest that α7 nAChR agonists may increase synaptic plasticity in hippocampal slices, at least in part, through a circuit-level enhancement of a specific subtype of GABAergic receptor.