He played AAU basketball for Hancock Construction and, after that year, decided to enroll at Indiana State University in Terre Haute, where he was coached by Bob King.
King suffered a stroke prior to the 1978–79 season and assistant Bill Hodges was promoted to head coach. Hodges had been scouting Bird and really wanted him to play for ISU. Bird led the Sycamores to the NCAA championship game in 1979, his senior season, only to lose to the Michigan State University Spartans, who were led by his future NBA rival, Earvin "Magic" Johnson. The Sycamores finished the season 33–1. That year, Bird won the USBWA College Player of the Year, Naismith and Wooden Awards, given to the year's top male college basketball player. After his three seasons at Indiana State, he left as the fifth-highest scorer in NCAA history. Bird finished his collegiate career with an average of 30.3 points per game. He is on the Missouri Valley Conference All-Century Team.