Aromatic azo dyes possess inherent resistance and are known to be carcinogenic, posing a significant threat to human and ecosystems. Enhancing the biodegradation of azo dyes usually requires the presence of co-metabolic substrates to optimize the process. In addressing the issue of excessive waste activated sludge (WAS) generation, this study explored the potential of utilizing alkaline-thermal hydrolysate of WAS as a co-metabolic substrate to boost the degradation of reactive black 5 (RB5) dyes. The acclimated microbial consortium, when supplemented with the WAS hydrolysate obtained at a hydrolysis temperature of 30 °C, achieved an impressive RB5 decolorization efficiency of 90.3% (pH = 7, 35 °C) with a corresponding COD removal efficiency of 45.0%. The addition of WAS hydrolysate as a co-substrate conferred the consortium with a remarkable tolerance to high dye concentration (1500 mg/L RB5) and salinity levels (4–5%), surpassing the performance of conventional co-metabolic sugars in RB5 degradation. 3D-EEM analysis revealed that protein-like substances rich in tyrosine and tryptophan, present in the WAS hydrolysate, played a crucial role in promoting RB5 biodegradation. Furthermore, the microbial consortium community exhibited an enrichment of dye-degrading species, including Acidovorax, Bordetella, Kerstersia, and Brevundimonas, which dominated the community. Notably, functional genes associated with dye degradation and intermediates were also enriched during the RB5 decolorization and biodegradation process. These findings present a practical strategy for the simultaneous treatment of dye-containing wastewater and recycling of WAS.