Ally Sheedy was born in New York City, to Charlotte (Baum), a press agent and writer, and John J. Sheedy, Jr., an advertising executive. She is of Russian Jewish (mother) and Irish and German (father) descent. While at New York's Bank Street School, twelve-year old Ally Sheedy wrote about a mythical encounter between Queen Elizabeth I and an inquisitive mouse. The result, "She Was Nice to Mice", was published by McGraw-Hill and became an instant best seller. Although it proved a springboard to an acting career, Sheedy's strongest memories of childhood remain those of "dancing and doing plays". From six until fourteen, she danced with the American Ballet Theatre and, during summers at Fire Island, she'd "get a bunch of kids together and stage shows on back lawns and porches". When she discovered that to stay with dancing meant staying with starvation diets, she shifted her focus to acting for good. Meanwhile, her book brought her requests from several publications. The Village Voice asked her to review movies and the New York Times wanted her to review children's books. The assignment she accepted was from Ms. Magazine, which requested an article about her mother and herself. It was an appearance on "The Mike Douglas Show (1961) to promote her book, however, that brought Sheedy work as a performer.
Signed by an agent who caught the show, she was sent out on television commercials, immediately. Only 15 at the time, she also performed off-Broadway and on a series of after-school specials. The day she turned 18, Sheedy packed her bags and headed for Los Angeles, where she enrolled in the drama department at USC, and soon landed roles in the television drama The Best Little Girl in the World (1981), The Day the Loving Stopped (1981), Splendor in the Grass (1981) and Homeroom (1981) and played a recurring character on Hill Street Blues (1981). The strength of her performances led directly to her film debut as Sean Penn's naive-but-knowing girlfriend, "J.C.", in Bad Boys (1983). That same year (1983), she starred as Matthew Broderick's zany partner in WarGames (1983). After starring as Rob Lowe's would-be romantic interest in Oxford Blues (1984), the withdrawn adolescent of The Breakfast Club (1985) and Gene Hackman's adoring daughter in Twice in a Lifetime (1985), Sheedy played her first fully-adult role in St. Elmo's Fire (1985), the 1985 hit about college friends.