Higgins was born in Nouméa, New Caledonia, France, to an Australian mother, Joy (Kelly), and American father, John Edward Higgins, one of six sons. Higgins' father enlisted in the army following the attack on Pearl Harbor, and his mother returned to her home in Sydney with Colin and his elder brother. Apart from a brief stint in San Francisco in 1945, Higgins lived in Sydney until 1957, mostly in the suburb of Hunters Hill, attending school at Saint Ignatius' College, Riverview.

Higgins was discharged in 1965, spent six months in Europe, mostly in Paris, then returned to Stanford University to study a Bachelor of Arts in Creative Writing. Higgins later said, "after I had traveled and worked for a while I was anxious to study for the sake of studying. I took courses for what they were, not so that I could sleep in."

He visited Expo 67 in Montreal and was inspired by the film exhibits there and decided to learn about film. He studied a Master of Fine Arts in screenwriting at UCLA, where his classmates included Paul Schrader. While there he made two short films, Opus One (1968), a satire on student films, and Retreat, an anti-war statement. His M.F.A. thesis would serve as the basis for Harold and Maude (1971).

Higgins got an offer to write a Movie of the Week for TV, The Devil's Daughter (1972), which he later described as "just a job". He then received an offer from Jean-Louis Barrault in Paris to turn Harold and Maude into a play for French actor Madeleine Renaud. Higgins did so, working on the French translation with Jean-Claude Carriere, and the play ran for seven years. The film of Harold and Maude continued to run in cinemas around the world, where by 1983 it was in profit. (The same year it was estimated Higgins had earned $1 million from his script and productions of the play.)

Higgins then wrote the script for the thriller Silver Streak (1976), which became a hit under the direction of Arthur Hiller. Higgins later said if he had directed it he would have been "a bit less faithful to the writer; I would have slashed away."

The success of Silver Streak enabled Higgins to direct his next script, Foul Play (1978). It was enormously popular at the box office and launched his directing career.

He was writing a comedy-thriller, The Man Who Lost Tuesday when he received an offer to re-write and direct 9 to 5 (1980). It was a big hit, as was the musical The Best Little Whorehouse in Texas (1982) which Higgins directed.

In 1985 he was working on a project with Playwright Jonathan Reynolds. In 1986 he was reportedly writing a script, Washington Girls, as a vehicle to reunite Jane Fonda, Lily Tomlin and Dolly Parton.

Established in 1986, the Colin Higgins Foundation provides support for gay and transgender youth. It was established by Higgins following his diagnosis with HIV in 1985. His writing is said to have inspired filmmakers like Judd Apatow, Seth Rogen, Wes Anderson and Paul Feig.

His last credit was a TV movie, Out on a Limb (1987) which he co-wrote and co-produced.

Higgins, who was openly gay, died of an AIDS-related death at his home on 5 August 1988 and was buried in Valhalla Memorial Park Cemetery.

He is not to be confused with a British actor of the same name who is known to Star Wars trivia buffs as "Fake Wedge" and who died in December 2012.