Following a similar premise to the previous game, Danganronpa 2 puts players in control of Hajime Hinata, an amnesiac boy who has just become one of Hope's Peak Academy's 'Ultimate' students, alongside fifteen others. The students find themselves taken to a remote tropical island called Jabberwock (ジャバウォック島 Jabawokku-tō^?) by their alleged teacher, a small, rabbit-like mascot named Usami, who claims it to be a simple field trip. However, things turn out to be too good to be true as Hope's Peak Academy's notorious principal, Monokuma, announces they are stuck on the island for life unless they can murder another student and get away with it. If the students can determine a murderer in a Class Trial, that culprit is executed, but if they make the wrong assumption, then the killer walks home free whilst everyone else is sentenced to death.

Over the course of the game, several students are murdered, and thanks to Hajime's investigative skills, their killers are found out and executed. However, Hajime begins to realize something isn't quite right with the world, and discovers a terrible truth. He and his fellow students are in fact the surviving members of Ultimate Despair, a group led by the first game's antagonist, Junko Enoshima, whose sole purpose was to spread despair to the world. They managed to instigate a worldwide rebellion that caused society to collapse. However, one group, called the Future Foundation, has been attempting to undo the damage Ultimate Despair caused. They captured the surviving members, but instead of executing them, decided to try and rehabilitate them by erasing their memories and putting them in a virtual reality program.

Upon finding out that they are in a program and that all of the students are merely artificially constructed avatars, Hajime is then contacted by Makoto Naegi, the protagonist from the first game and now a member of the Future Foundation. He warns Hajime that an artificial intelligence copy of Junko Enoshima, based on the "Alter Ego" AI from Trigger Happy Havoc, has hijacked their program, and is trying to manipulate events so that once the surviving students "graduate", she can possess the bodies of the deceased students, which are still intact in the real world. Alter Ego Junko's ultimate plan is to download herself into every person on the planet. Makoto tells Hajime that if the class votes not to graduate, it will allow him to reset the system and purge Alter Ego Junko. However, that also means that the student avatars will be deleted, along with all of the memories they gained while in the simulation.

Junko attempts to convince Hajime by revealing that he was formerly the genius leader of Ultimate Despair, Izuru Kamakura. He and the other students hesitate, afraid of reverting to their original personalities. However, Hajime eventually finds the inner courage to thwart Alter Ego Junko's plan, and convinces the other students to refuse graduation, saying that they will create a future where they do not have to forget. Makoto then resets the system and deletes Alter Ego Junko.

In the epilogue, Makoto, and fellow survivors and Future Foundation members Kyoko Kirigiri and Byakuya Togami look on as the students decide to return to the island. They muse that they are already vastly different from their original Ultimate Despair personalities, choosing to stay behind on the island to look after their comatose friends who were "killed" in the simulation. Even though the chance is extremely small, Makoto is confident that the students will find a way to revive their friends.

Upon beating the game, players can unlock an alternative story mode where Usami manages to prevent Monokuma from taking over the island, so the field trip goes on as planned. This allows to the player to freely socialize with the other characters.