Dillard's memoir An American Childhood describes her youth in loving detail. She is the oldest of three daughters, born to affluent parents, Frank and Pam Doak, who raised her in an environment that encouraged humor, creativity, and exploration. Her mother was a non-conformist and incredibly energetic. Her father taught her everything from plumbing to economics to the intricacies of the novel On The Road. Her days were filled with piano and dance classes, rock and bug collecting, and reading books from the public library. But she was not shielded from the dark side of history and human nature, such as the horrors of war in the 20th century, which she often read about.

Dillard attended the Shadyside Presbyterian Church in Pittsburgh, which her parents did not attend. She also spent four summers at First Presbyterian Church (FPC) Camp, in Ligonier, Pennsylvania. During her rebellious teenage years, she quit attending church because of the "hypocrisy." When she told her minister of her decision, he gave her a stack of books by C. S. Lewis, which eventually put an end to her rebellion. After her college years, Dillard became, as she says, "spiritually promiscuous," incorporating the ideas of many religious systems into her own religious understanding. Not only are there references to Christ and the Bible in her first prose book, Pilgrim at Tinker Creek, but also to Judaism, Buddhism, Sufism, and even Eskimo spirituality. One literary critic states that in 1988, Dillard converted to Roman Catholicism. However, Dillard, writing on her official website, denies this. "Almost everything on Wikipedia about me is wrong. I'm not a real painter. Nor am I an "eco-" anything, nor have I ever been. I have no religion, or many religions."

After graduating from high school, Dillard attended Hollins College (now Hollins University), in Roanoke, Virginia, where she studied literature and creative writing. She married her writing teacher, the poet R. H. W. Dillard, the person who, she says, "taught her everything she knows" about writing. In 1968 she graduated with an MA in English, after writing a thesis on Thoreau's Walden, which focused on Walden Pond as "the central image and focal point for Thoreau's narrative movement between heaven and earth." Dillard spent the first few years after graduation painting and writing, publishing several poems and short stories.

After a near-fatal bout of pneumonia in 1971, Dillard began Pilgrim at Tinker Creek. She spent eight years living near Tinker Creek, a suburban area surrounded by forests, creeks, mountains, and myriad animal life. When she wasn't reading, she spent her time outdoors walking. Dillard began to write about her experiences near the creek. She started by transposing notes from her 20-plus-volume reading journal. It took her eight months to turn the notecards into the book. Towards the end of the eight months, she was so absorbed that she sometimes wrote for 15 hours a day, cut off from society without interest in current events, such as the Watergate scandal. The finished book brought her a Pulitzer Prize in 1975, when she was 29.

She moved to Washington, as a writer in residence at Western Washington University. Divorced from her first husband after ten years of marriage, she married Gary Clevidence, an anthropology professor at Fairhaven College; they have a daughter, Rosie.In Washington, she wrote Holy the Firm. She has also written a memoir about growing up in Pittsburgh, An American Childhood, and two novels, The Living, and The Maytrees.

She is currently married to the historical biographer Robert D. Richardson, whom she met after sending him a fan letter about his book Henry Thoreau: A Life of the Mind.

Dillard taught for a many years as a distinguished visiting professor in the English department of Wesleyan University, in Middletown, Connecticut. She now splits her time between Hillsborough, North Carolina and Wythe County, Virginia.