In addition to the prefrontal cortex (PFC), the basal ganglia (BG) have been increasingly often reported to play a fundamental role in category learning, but the systems-level circuits of how both interact remain to be explored. We developed a novel neuro-computational model of category learning that particularly addresses the BG-PFC interplay. We propose that the BG bias PFC activity by removing the inhibition of cortico-thalamo-cortical loop and thereby provide a teaching signal to guide the acquisition of category representations in the cortico-cortical associations to the PFC. Our model replicates key behavioral and physiological data of macaque monkey learning a prototype distortion task from Antzoulatos and Miller (2011). Our simulations allowed us to gain a deeper insight into the observed drop of category selectivity in striatal neurons seen in the experimental data and in the model. The simulation results and a new analysis of the experimental data, based on the model’s predictions, show that the drop in category selectivity of the striatum emerges as the variability of responses in the striatum rises when confronting the BG with an increasingly larger number of stimuli to be classified. The neuro-computational model therefore provides new testable insights of systems-level brain circuits involved in category learning which may also be generalized to better understand other cortico-basal ganglia-cortical loops.