Stansbury, 56, was at the Mississippi State helm from 1998 to 2012, going 293-166 and making six NCAA tournament appearances. He had been an assistant on Billy Kennedy's staff at Texas A&M the past two seasons.
The Battletown, Kentucky, native replaces Ray Harper, who resigned last week after five seasons with the Hilltoppers.
Stansbury takes over a Hilltoppers program that won two Sun Belt titles and made two NCAA tournament appearances under Harper. But Western Kentucky has drawn attention after the March 17 suspensions of guards Fredrick Edmond, Marlon Hunter and Chris McNeal and the coach's subsequent resignation hours later.
Stansbury has roots in the Bluegrass State along with ties to WKU.
His great-uncle, Edgar B. Stansbury, is in the school's Hall of Fame after playing three sports and serving as assistant football coach and athletic director.
The younger Stansbury graduated from Meade County High School and Campbellsville University, where he was a student assistant in 1981-82. He was also a graduate assistant at Cumberland in Williamsburg, Kentucky, and an assistant coach at Austin Peay in Tennessee.
He spent eight years under Richard Williams at Mississippi State before taking over in 1999 and becoming the program's winningest coach. During his long stay in Starkville, Stansbury guided the Bulldogs to 11 postseason appearances and was The Associated Press' SEC Coach of the Year in 2004.
Edmond, Hunter and McNeal were suspended after a disciplinary hearing for an undisclosed violation. The school has cited federal privacy law in not releasing any information or commenting on the discipline. However, the school said last week that all three remain enrolled at Western Kentucky following an open records request by the AP.
The Hilltoppers have Tennessee transfers Willie Carmichael and Jabari McGhee available next season.
ESPN Insider Jeff Goodman and The Associated Press contributed to this report.