Protective osmolytes are chemical compounds that shift the protein folding/unfolding equilibrium toward the folded state under osmotic stresses. The most widely considered protection mechanism assumes that osmolytes are depleted from the protein's first solvation shell, leading to entropic stabilization of the folded state. However, recent theoretical and experimental studies suggest that protective osmolytes may directly interact with the macromolecule. As an exemplary and experimentally well-characterized system, we herein discuss poly(N-isopropylacrylamide) (PNiPAM) in water whose folding/unfolding equilibrium shifts toward the folded state in the presence of urea. On the basis of molecular dynamics simulations of this specific system, we propose a new microscopic mechanism that explains how direct osmolyte-macromolecule interactions confer stability to folded states. We show that urea molecules preferentially accumulate in the first solvation shell of PNiPAM driven by attractive van der Waals dispersion forces with the hydrophobic isopropyl groups, leading to the formation of low entropy urea clouds. These clouds provide an entropic driving force for folding, resulting in preferential urea binding to the folded state and a decrease of the lower folding temperature in agreement with experiment. The simulations further indicate that thermodynamic nonideality of the bulk solvent opposes this driving force and may lead to denaturation, as illustrated by simulations of PNiPAM in aqueous solutions with dimethylurea. The proposed mechanism provides a new angle on relations between the properties of protecting and denaturing osmolytes, salting-in or salting-out effects, and solvent nonidealities.