Simpson was born in Green Bay, Wisconsin to Joanne Carole Schieble and Abdulfattah Jandali, a political science professor. Her mother was an American of Swiss and German descent and her father was a Syrian Muslim. She later took her stepfather's surname, Simpson. She is the biological younger sister of Steve Jobs, co-founder and current CEO of Apple. Because Jobs was placed for adoption as a baby by their then-unmarried parents, she first met her sibling as an adult.

She attended the University of California, Berkeley, where she studied with Jackson Burgess, Seamus Heaney, Leonard Michaels and Thom Gunn. After receiving a B.A. in English from Berkeley in 1979, she enrolled at Columbia University, where she earned an M.F.A. She worked for Paris Review during this period.

At Columbia she began her first published novel, Anywhere but Here, the story of a turbulent mother-daughter relationship. The book became a bestseller when published by Knopf in 1987, and was subsequently adapted into a film in 1999. Anywhere But Here was followed by The Lost Father (which was based on her attempts to find her father Jandali, who had left her and her mother when Simpson was aged four) and A Regular Guy. She has since published the novel Off Keck Road, which was nominated for a PEN/Faulkner Award. Excerpts from her new novel My Hollywood have appeared in Harper's Magazine, The Atlantic Monthly, Best American Short Stories, and on This American Life.

Simpson is also a contributor to various anthologies and essay collections. She is the Sadie Samuelson Levy Professor in Languages and Literature at Bard College. She was married to the television writer and producer Richard Appel and they have two children. Appel, a writer for The Simpsons, used his wife's name for Homer Simpson's mother, beginning with the episode "Mother Simpson".