The rapid growth of the dairy sector, propelled by a rising global demand for dairy products, resulting in significant water consumption and substantial wastewater production. Dairy wastewater poses a serious environmental challenge due to its high concentrations of organic and inorganic pollutants, including fatty acids, proteins, nutrients (nitrogen and phosphorus), salts, and trace metals. This review provides a thorough analysis of current wastewater treatment technologies, encompassing traditional physicochemical methods as well as new and innovative approaches. Special emphasis is placed on the pollutant-rich characteristics of dairy wastewater, identifying it as a viable resource for the sustainable cultivation of microalgae under stress conditions. Various stress-inducing strategies—such as limiting nutrients (like nitrogen and phosphorus), altering salinity, adjusting light intensity, and varying temperature—are explored for their roles in enhancing the accumulation of valuable macromolecules, such as lipids, in various microalgal strains. Optimizing these stress conditions is essential for maximizing lipid yield while also boosting the effectiveness of wastewater treatment. This integrated approach of utilizing readily available dairy wastewater for stress-induced microalgae cultivation, offers a promising pathway toward achieving two key objectives: (i) sustainable biofuel production through lipid extraction and (ii) effective wastewater treatment, thereby promoting circular economy. The review also evaluates the environmental benefits, economic viability, and social implications of this dual-purpose strategy.