This article looks at a challenge-based learning (CBL) approach that aims to engage students in sustainable transitions within urban and regional planning. Drawing on CBL, we focus on how living labs -- the idea of using a city as a site for user-driven innovation and development -- can be used as a site and methodology in education and research on planning for sustainability. The paper presents insight from teaching planning master's students and a living lab initiative in Linköping, Sweden. We aim to contribute to research on how to teach sustainable transitions within urban and regional planning by focusing on CBL and propose a methodology using a challenge-driven living lab aimed at supporting sustainable transformation learning. We mean that educational engagement with living lab approaches can be both a study tool and potentially an arena for change. Our experiences from teaching a living lab exercise illustrate the value of working with challenge based-learning approaches and "real-life" challenges, the added value from projects consisting of various actors including external groups, and the need for constructive peer-based and student-led learning. We suggest that a challenge-driven living lab methodology can be useful in teaching sustainable transformation in Geography and Planning and have wider implications.