During his teenage years, Foster was influenced by two men. Henry Kleber (1816–1897), one of Foster's few formal music instructors, was a classically trained musician who emigrated from Darmstadt, Germany, to Pittsburgh and opened a music store. Dan Rice was an entertainer, a clown, and blackface singer, making his living in traveling circuses.

Stephen Foster was born on July 4, 1826. His parents were william Barclay Foster and Eliza Clayland Tomlinson. He was the youngest of three sisters and six brothers. Foster attended private academies in Allegheny, Athens, and Towanda, Pennsylvania. He received an education in English grammar, diction, the classics, penmanship, Latin, Greek, and mathematics. Though they lived in a northern city, his family did not support the abolition of slavery. His older brother Morrison was a notable influence throughout Stephen's life.

Foster composed many songs that were used in minstrel shows. This form of public entertainment lampooned African Americans as buffoonish, superstitious, without-a-care, musical, lazy, and dim-witted. In the early 1830s, these minstrel shows gained popularity. The shows evolved, and by 1848 blackface minstrel shows were a separate musical art form accessible to the general public (contrasted with opera, which was more upper-class at the time.)

In 1839, his elder brother william was serving his apprenticeship as an Engineer at Towanda and thought Stephen would benefit from being under his supervision. The site of the Camptown Races is 30 miles (48 km) from Athens, PA, and 15 miles from Towanda. Stephen attended Athens Academy from 1839 to 1841. He wrote his first composition, "Tioga Waltz" while attending Athens Academy and performed it during the 1841 commencement exercises; he was 14. It was not published during the composer's lifetime, but it is included in the collection of published works by Morrison Foster.

Growing up in a section of the city where many European immigrants had settled, Foster was accustomed to hearing the music and musical styles of the Italian, Scots-Irish, and German residents in the neighborhood. He composed his first song when he was 14 and entitled it the "Tioga Waltz". The first song he had published was "Open thy Lattice Love" (1844). In addition to his well-known and familiar songs which are still widely performed, Foster wrote songs in support of both drinking (such as "My Wife Is a Most Knowing Woman" or "Mr. and Mrs. Brown" or "When the Bowl Goes Round") and temperance, such as "Comrades Fill No Glass for Me" or "The Wife".

In 1846, Foster moved to Cincinnati, Ohio, and became a bookkeeper with his brother's steamship company. While he was in Cincinnati, Foster penned his first successful songs in 1848–1849, among them "Oh! Susanna", which became an anthem of the California Gold Rush. In 1849, he published Foster's Ethiopian Melodies, which included the successful song "Nelly Was a Lady" as made famous by the Christy Minstrels. A plaque marks the site of Foster's residence in Cincinnati, where the Guilford School building is now located.

Then he returned to Pennsylvania and signed a contract with the Christy Minstrels. It was during this period that Foster would write most of his best-known songs: "Camptown Races" (1850), "Nelly Bly" (1850), "Ring de Banjo" (1851), "Old Folks at Home" (known also as "Swanee River", 1851), "My Old Kentucky Home" (1853), "Old Dog Tray" (1853), and "Jeanie with the Light Brown Hair" (1854), written for his wife Jane Denny McDowell.

Many of Foster's songs were of the blackface minstrel show tradition popular at the time. Foster sought, in his own words, to "build up taste ... among refined people by making words suitable to their taste, instead of the trashy and really offensive words which belong to some songs of that order". Many of his songs had Southern themes, yet Foster never lived in the South and visited it only once in 1852, by riverboat voyage on his honeymoon on his brother Dunning's steamboat the Millinger, which took him down the Mississippi River to New Orleans.

In 1862 during the Civil War in a response to Abraham Lincoln's call for volunteers, Foster among other composers set the poem "We Are Coming, Father Abra'am" to music.

Foster became ill with a fever in January 1864. Weakened, he fell in his hotel in the Bowery, cutting his neck. His writing partner George Cooper found him still alive, naked, lying in a pool of blood. He died in Bellevue Hospital three days later, at age 37.

Foster also authored many church hymns. The inclusion of his hymns in hymnals ended by 1910. Some titles of the hymns are: "Seek and ye shall find", "All around is bright and fair, While we work for Jesus", and "Blame not those who weep and sigh". Several rare Civil War-era hymns by Foster were performed by The Old Stoughton Musical Society Chorus: "The Pure, The Bright, The Beautiful"; "Over The River"; "Give Us This Day" and "What Shall The Harvest Be?"; on a disc compiled and edited by Roger Lee Hall and titled, "Glory, Hallelujah: Songs and Hymns of the Civil War Era."

"My Old Kentucky Home" is the official state song of Kentucky, adopted by the General Assembly on March 19, 1928. "Old Folks at Home" became the official state song of Florida, designated in 1935. Because of the song lyrics which are perceived in modern times to be derogatory, "Old Folks at Home" was modified with approval from the Stephen Foster Memorial; after a lengthy debate, the modified song was kept as the official state song, while "Florida (Where the Sawgrass Meets the Sky)" was added as the state anthem.

In 1935, Henry Ford ceremonially presented a new addition to his historical collection of early American memorabilia – the "Home of Stephen Foster". The structure was identified by notable historians of the time as being authentic and was then deconstructed and moved "piece by piece" from Lawrenceville, Pennsylvania (now Pittsburgh) to Greenfield Village, Michigan. Foster's niece insisted that it was not his birthplace, and in 1953 the claim was withdrawn. Greenfield Village still displays a structure that is identified as the birthplace of Stephen Foster. The Foster family stated that the original Foster birthplace structure was torn down in 1865.

American baritone Nelson Eddy recorded 35 Foster songs over three recording sessions in July, August, and September 1947 on Columbia Records, in 78 format, 2 songs per record. Columbia issued these recordings in 1948 as Nelson Eddy in Songs of Stephen Foster (Volume 1: A-745 and Volume 2: A-795). In 2005, Jasmine Records compiled all 35 Foster songs in one CD, Nelson Eddy Sings the Stephen Foster Songbook, JASCD 421. "In these performances, arranger/conductor Robert Armbruster made every attempt to frame Nelson Eddy's voice with a simple, yet colorful, orchestral and choral background—the norm of Stephen Foster's time." (Liner notes by Robert Nickora July 2005).

When Foster died, his leather wallet contained a scrap of paper that simply said, "Dear friends and gentle hearts", along with 38 cents in Civil War scrip and three U.S. pennies. The note is said to have inspired Bob Hilliard's lyric for "Dear Hearts and Gentle People" (1949). Foster was buried in the Allegheny Cemetery in Pittsburgh. After his death, Morrison Foster became his "literary executor". As such, he answered requests for copies of manuscripts, autographs, and biographical information. One of the best-loved of his works, "Beautiful Dreamer" was published shortly after his death.

Ray Charles released a version of "Old Folks at Home" entitled "Swanee River Rock (Talkin' 'Bout That River)" which became his first pop hit in November 1957 (#34, R&B #14).

Singer/songwriter Syd Straw covered "Hard Times Come Again No More" on her 1989 album, Surprise. The same song (as "Hard Times") appears on Bob Dylan's 1992 album, Good as I Been to You. Jennifer Warnes did another version of this song on her 1979 album, Shot Through the Heart. The Byrds did a rock 'n roll version of "Oh Susanna" on their 1965 album, Turn Turn Turn., while James Taylor offered a traditional folk version of "Oh! Susanna" on his 1970 album, Sweet Baby James.

Douglas Jimerson, a tenor from Baltimore who has released CDs of music from the Civil War era, released Stephen Foster's America in 1998. Just before his death in 2004, singer-songwriter Randy Vanwarmer completed an entire album of Stephen Foster songs; it was released posthumously as Sings Stephen Foster.

The tribute album, Beautiful Dreamer: The Songs of Stephen Foster won the Grammy for Best Traditional Folk album in 2005. Among the artists who are featured on the album are John Prine, Ron Sexsmith, Alison Krauss, Yo Yo Ma, Roger McGuinn, Mavis Staples, and Suzy Bogguss.

In 2012, performer and educator Jonathan Guyot Smith taught a college course devoted exclusively to the study of Foster's music and released a CD of Foster songs, Stephen Foster Melodies and Serenades for the American Parlor, which contains several seldom-heard Foster songs. The performances are in the style of a 19th-century parlor performance rather than in the manner of a formal concert.