Toole's childhood in Uptown New Orleans was rather sheltered, dominated by his mother Thelma Ducoing Toole who seldom let her only child play with other children, explaining to everyone that her son was a genius. After an undergraduate degree from Tulane University, Toole received a master's degree at Columbia University, and then spent a year as assistant professor of English at the University of Southwestern Louisiana (now UL Lafayette) in Lafayette, Louisiana. He then went to New York to take a teaching position at Hunter College. Toole also spent some time pursuing a doctorate at Columbia, but did not finish because he was drafted into the U.S. Army in 1961, where he served two years in Puerto Rico teaching English to Spanish-speaking recruits.

After his time in the military, Toole returned to New Orleans to live with his parents and began to teach at Dominican College. He spent time hanging around the French Quarter with musicians and, on at least one occasion, helped a musician friend with his second job selling tamales from a cart. After Toole graduated with honors from Tulane University, he worked briefly in a men's clothing factory. Both of these scenarios played a part in the inspiration for his great comic novel A Confederacy of Dunces.

Toole sent his novel's manuscript to Simon and Schuster. After initial excitement about the book, the publisher eventually rejected it, saying that the book "isn't really about anything." Toole began to deteriorate rapidly after he lost hope of publishing his book, which he considered to be a masterpiece. He began to drink heavily and started taking medication for headaches; he also stopped teaching at Dominican and quit his doctoral classes at Tulane.

Some biographers have since suggested that Toole was confused about his sexuality, which added to his depression. One friend has suggested that his domineering mother left no emotional room for any other woman in Toole's life. Some friends and family of Toole disagree with suggestions that Toole was a homosexual, including David Kubach, a longtime friend who also served with Toole in the army. The authors of the first biography of Toole to be published did not know him, and "not knowing him makes a big difference", Kubach said. A second book about Toole by his old friend Joel Fletcher was published in 2005. Ronald W. Bell's thesis, "The Nihilistic Perspective of John Kennedy Toole" (2000, California State University, Dominguez Hills) posits the notion that Toole's novels were a mirror of the author's life and reflect a bleak view of human existence, that Toole felt a despair over the human condition.

Toole committed suicide on March 26, 1969, after disappearing from New Orleans, by putting one end of a garden hose into the exhaust pipe of his car and the other into the window of the car in which he was sitting. The suicide note he left was destroyed by his mother, who made conflicting statements as to its general contents. He was buried at Greenwood Cemetery in New Orleans.

After his death, Toole's mother insisted that author Walker Percy read the manuscript for Dunces. Percy eventually gave in and fell in love with the book. A Confederacy of Dunces was published in 1980, and Percy provided the foreword.

Toole, and his novel, posthumously won a Pulitzer Prize for Fiction (1981). The book has sold more than 1.5 million copies in 18 languages.

Toole's only other novel is The Neon Bible, which Toole wrote at age 16 and which he considered too juvenile a writing attempt to submit for publication while he was alive. Due to the great interest in Toole, The Neon Bible was published in 1989.

A statue of Toole's most famous character, Ignatius Reilly, can be seen at 800 Iberville Street in New Orleans.