Terkel was born to a Russian Jewish tailor, Samuel Terkel, and Anna Finkelin in New York City, New York. At the age of eight he moved with his family to Chicago, Illinois, where he spent most of his life. He had two brothers, Ben (1907–1965) and Meyer (1905—1958).

From 1926 to 1936, his parents ran a rooming house that was a collecting point for people of all types. Terkel credited his knowledge of the world to the tenants who gathered in the lobby of the hotel and the people who congregated in nearby Bughouse Square. In 1939, he married Ida Goldberg (1912–1999) and they had one son, Dan.Terkel received his law degree from the University of Chicago Law School in 1934, but he said that instead of practicing law, he wanted to be a concierge at a hotel and he soon joined a theater group.

Terkel joined the Works Progress Administration's Federal Writers' Project, working in radio, doing work that varied from voicing soap opera productions and announcing news and sport, to presenting shows of recorded music and writing radio scripts and advertisements. His well-known radio program, titled The Studs Terkel Program, aired on 98.7 WFMT Chicago between 1952 and 1997.Previous Terkel radio work included WENR (1944 'Wax Museum'), WCFL (beginning November 30, 1947). A TV show ('Stud's Place' beginning November, 1949) lasted to 1951. The one-hour program was broadcast each weekday during those forty-five years. On this program, he interviewed guests as diverse as Bob Dylan, Leonard Bernstein, and Alexander Frey. In the late 1940s and early 1950s, Terkel was also the central character of Studs' Place, an unscripted television drama about the owner of a greasy-spoon diner in Chicago through which many famous people and interesting characters passed. This show, along with Marlin Perkins's Zoo Parade and the children's show Kukla, Fran, and Ollie, are widely considered canonical examples of the Chicago School of Television.

Terkel published his first book, Giants of Jazz, in 1956. He followed it with a number of other books, most focusing on the history of the United States people, relying substantially on oral history. He also served as a distinguished scholar-in-residence at the Chicago History Museum. He appeared in the film Eight Men Out, based on the Black Sox Scandal, in which he played newspaper reporter Hugh Fullerton, who tries to uncover the White Sox players' plans to throw the 1919 World Series.

Terkel received his nickname while he was acting in a play with another person named Louis. To keep the two straight, the director of the production gave Terkel the nickname Studs after the fictional character about whom Terkel was reading at the time—Studs Lonigan, of James T. Farrell's trilogy.

Terkel was acclaimed for his efforts to preserve American oral history. His 1985 book An Oral History of World War Two, which detailed ordinary peoples' accounts of the country's involvement in World War II, won the Pulitzer Prize. For An Oral History of the Great Depression, Terkel assembled recollections of the Great Depression that spanned the socioeconomic spectrum, from Okies, through prison inmates, to the wealthy. His 1974 book, Working, in which (as reflected by its subtitle) People Talk About What They Do All Day and How They Feel About What They Do, also was highly acclaimed. Working was made into a short-lived Broadway show in 1978 and was telecast on PBS in 1982. In 1997, Terkel was elected a member of The American Academy of Arts and Letters. Two years later, he received the George Polk Career Award in 1999.

In 2004, Terkel received the Elijah Parish Lovejoy Award as well as an honorary Doctor of Laws degree from Colby College. In August 2005, Terkel underwent successful open-heart surgery. At the age of ninety-three, he was one of the oldest people to undergo this form of surgery and doctors reported his recovery to be remarkable for someone of that advanced age.

On May 22, 2006, Terkel, along with other plaintiffs, filed a suit in federal district court against AT&T, to stop the telecommunications carrier from giving customer telephone records to the National Security Agency without a court order. American Civil Liberties Union : Author Studs Terkel, Other Prominent Chicagoans Join in Challenge to AT&T Sharing of Telephone Records with the National Security Agency

The lawsuit was dismissed by Judge Matthew F. Kennelly on July 26, 2006. Judge Kennelly cited a "state secrets privilege" designed to protect national security from being harmed by lawsuits. Judge Drops Studs Terkel NSA Lawsuit

In 2006, Terkel received the Dayton Literary Peace Prize's first-ever Lifetime Achievement Award.

Terkel completed a new personal memoir entitled, Touch and Go, published in the fall of 2007.

Terkel was a self-described agnostic, which he jokingly defined as "a cowardly atheist" during a 2004 interview with Krista Tippett on NPR's Speaking of Faith. Movie critic Roger Ebert claimed that Terkel was an atheist.

One of his last interviews was for the documentary Soul of a People on Smithsonian Channel. He spoke about his participation in the Works Progress Administration.

At his last public appearance, in 2007, Terkel said he was "still in touch—but ready to go". He gave one of his last interviews on the BBC Hardtalk program on February 4, 2008. He spoke of the imminent election of Barack Obama as President of the United States, and offered him some advice, in October, 2008.

Terkel died in his Chicago home on Friday, October 31, 2008 at the age of ninety-six. He had been suffering ever since a fall in his home earlier in October 2008.