Van Rensselaer was born in New York City, the eldest child of Stephen Van Rensselaer II {a great-grandson of Mayor of New York Stephanus Van Cortlandt} and Catharina Livingston {daugther of Philip Livingston}. His family was very wealthy, and the Van Rensselaer Manor House was a rich childhood environment for the young boy to grow up in. However, his father died in 1769, when Van Rensselaer was only five, and the heir to his father's estate.

Van Rensselaer was raised by his uncle, Abraham Ten Broeck, who administered the Van Rensselaer estate after Van Rensselaer II's untimely death. At an early age, Van Rensselaer III was raised to succeed his father as lord of the manor, and the remarriage of his mother to Dominie Westerlo in 1775 did nothing to change this. To this end he was sent off to school, and in 1782, Van Rensselaer graduated from Harvard University. One year later, he married Margarita Schuyler, the daughter of renowned Revolutionary War general Philip Schuyler. Van Rensselaer was only nineteen years old, but Margarita's death in 1801 would cause him to enter into his second marriage one year later with Cornelia Paterson, daughter of former New Jersey Governor William Paterson.

On his 21st birthday, Van Rensselaer took possession of his family's prestigious estate, close to 12,000 square miles (31,000 km²) in size, named Rensselaerswyck, and began a long tenure as lord of his family's manor. Van Rensselaer desired to make money off of the land that was suddenly his, but was extremely reluctant to sell it off. Instead, he granted tenants perpetual leases at moderate rates, which saved would-be landholders from having to pay all of their money up front. This meant that they could invest more in their operations, which led to increased productivity in the area. Over time, Van Rensselaer would become landlord over 3,000 tenants, and proved a lenient and benevolent landowner. His tenants, who did not have to work in fear of sudden foreclosure or unfair treatment, were able to focus on their work, and the productivity Van Rensselaer created benefited the entire Albany area.

Van Rensselaer also spent a great deal of time in political pursuits, it is said more out of a sense of duty than of ambition. He served in the New York State Assembly from 1789 to 1791 and the New York State Senate from 1791 to 1796, being named Lieutenant Governor of the state in 1795. Van Rensselaer, over his time in politics, acquired a reputation as something of a reformer, voting in favour of extending the suffrage and going against much of New York's upper class in doing so.

In 1786, Van Rensselaer was made a major of the United States militia, which set him on a brief military career. Though the military was not Rensselaer's major pursuit, he was a militia major-general by 1801, a path which would come to a head during the War of 1812. Van Rensselaer, despite having held high rank in the militia for several decades, was, like most American militia officers at the time, virtually untrained and inexperienced. Clearly, Van Rensselaer was not a good choice to command an entire American army, but politics as much as military tactics dictated many of the military appointments of the day.

Van Rensselaer was a leading opposition candidate for Governor of New York, and the incumbent Daniel D. Tompkins was worried about the run the popular and wealthy Van Rensselaer could give him. However, the Republican Tompkins soon devised a way to remove Van Rensselaer from the picture, which was to offer him command of the United States Army of the Centre. If Van Rensselaer, who was, technically, a militia major-general, declined the post, then he would lose esteem in the eyes of the voters. If he accepted, he would be unable to run for Governor with the Federalists. If Van Rensselaer proved (as seemed likely) a poor general, he would be discredited and his reputation would be badly mauled. However, even if Van Rensselaer proved a natural and was able to do well, he would not be able to run for Governor because the military powers-that-be would refuse to remove him. Tompkins' clever maneuvering had eliminated his main rival, but it had given short shrift to the war that had only just begun.

Van Rensselaer accepted the post, and with his decidedly more soldierly cousin Solomon as his aide-de-camp, attempted to assure the honour of his country in the war (despite the fact that, as a Federalist, he had been against the war in the first place). But the Army of the Centre consisted largely of soldiers like himself - untrained, inexperienced militiamen, who, under the Constitution, did not actually have to cross over into Canada to fight. The British were in the process of fortifying the Queenston Heights that Van Rensselaer would have to attack, and his officers were itching for action despite their general's desire to delay. To make matters worse, Brigadier-General Alexander Smyth, Van Rensselaer's subordinate, had a large force of trained regulars that was theoretically under Van Rensselaer's overall command. However, Smyth, a regular soldier, continuously refused to obey Van Rensselaer's commands or answer his summons. With his officers planning to try and force Van Rensselaer out, the General saw that he had to act without Smyth against the fortified Queenston Heights position. It was a prodigious miscalculation.

On October 13, 1812, Van Rensselaer launched an attack on the British position that would evolve into the Battle of Queenston Heights, in which Van Rensselaer's forces were badly beaten by the British generals Isaac Brock and, after Brock's death, Roger Hale Sheaffe. Van Rensselaer's preparations and his plan of attack were clearly a major reason for the scale of the defeat, as he was unable to secure the element of surprise, did not procure enough boats for his men to cross easily, did not even get enough ammunition to his men. Despite badly outnumbering the British in the early stages of the battle, the American soldiers, untried and untrained, sometimes refused to cross the river, and Van Rensselaer was not even able to coax the boatmen into going back over to rescue the doomed attack force. The defeat at Queenston Heights spelled the end to Van Rensselaer's military career, and after the battle, he resigned his post. Van Rensselaer's political ambitions were far from over, but, as Daniel Tompkins had hoped, Van Rensselaer would never become Governor of New York.

After the war, Van Rensselaer still enjoyed a fair measure of popularity, and still had the energy to try to serve his country. He was on the canal commission for twenty-three years (1816-1839), fourteen of which he served as its president. In 1821, he was a member of the New York State Constitutional Convention, and two years later, he was elected by special election to the seat in the House of Representatives that his cousin Solomon had vacated. He served from February 27, 1822 to March 3, 1829, during the Seventeenth, Eighteenth, Nineteenth, and Twentieth Congresses; during the last three sessions, he was the chairman of the Committee on Agriculture. During this time he memorably cast the vote that put John Quincy Adams in the White House at the expense of Andrew Jackson.

After 1829, Van Rensselaer did not stand for re-election, and retired from political life to focus on educational and public welfare interests. He was regent of the University of New York from 1819 to 1839.

Van Rensselaer was a Freemason, and twice served as Grand Master of Masons for New York.

Despite his active life, Van Rensselaer's most lasting contribution to the world was to establish, with Amos Eaton, the Rensselaer School (now known as Rensselaer Polytechnic Institute, or RPI) "for the purpose of instructing persons, who may choose to apply themselves, in the application of science to the common purposes of life" in 1824. RPI became a well-respected American technological institution.

Stephen Van Rensselaer III died in 1839. He was buried on his family plot, but was later reinterred in the Albany Rural Cemetery.