Shepherd University was founded in the Reconstruction era as a consequence of a dispute over the location of the Jefferson County seat. In 1865, as a wartime measure, Union authorities moved the county seat from Charles Town to Shepherdstown, where it was housed in a large Classical style building that Rezin Davis Shepherd had built in 1860 for the town's use. With shifting political fortunes in the new state of West Virginia, the county seat returned to Charles Town in 1871. Eager to make use of the former courthouse, Shepherdstown residents secured a lease from Shepherd's heir, obtained a charter for "a classical and scientific institute," and opened the doors of Shepherd College in September 1871. In 1872, the legislature designated Shepherd as one of the six state normal schools whose main purpose was the education of teachers. The others were Marshall, West Liberty, Fairmont, Glenville, and Concord.

A coeducational institution from the beginning, by 1874 Shepherd had 160 students, making it the largest of the normals. Like the others, for more than a generation it was scarcely a high school, and meager state funding scattered among the six made it impossible for any of them to become a true normal school. Only the tuition fees, private contributions of local residents, and the dedication of principal Joseph McMurran (1871-82) and his faculty—who often worked without pay—kept Shepherd College alive during the lean years of the 1870s. Enrollment fell below 100 in 1878 and never reached the 1874 level again for more than a quarter-century.

Recognizing the inability of the state to adequately support the normals, legislators and governors at the turn of the century often threatened to close them altogether, particularly as locally funded high schools developed, but the regional popularity of the normals thwarted efforts to eliminate them. In the first decade of the 20th century, Shepherd turned in earnest to its original normal school mission, and under the administrations of John G. Knutti (1903-09) and Thomas C. Miller (1909-20) improved physical facilities, curriculum and faculty, laying the groundwork for the normal school to become a teachers college. Miller, like his predecessors, held the title of principal, but in 1919 he was officially designated president.

During the three long presidencies of W. H. S. White (1920-47), Oliver S. Ikenberry (1947-67), and James A. Butcher (1968-88), Shepherd gradually moved beyond its original mission to become an authentic college with regional and national standing. In White's era important changes included the elimination of the secondary grades, the addition of extension classes, and finally, in 1930, designation as a four-year teachers college with the authority to issue the bachelor of arts degree in both elementary and secondary education. In 1931, the legislature changed the name to Shepherd State Teachers College to reflect the new status. Gradually the school added more liberal arts degrees, and in 1943 the legislature authorized a return to the original name, Shepherd College.

Even after the attainment of four-year status, the coming of the Depression and World War II denied the college needed resources. During the war, the college's proximity to Washington helped to offset the wartime declines in enrollment as several training programs for the army and navy brought large numbers of servicemen to Shepherdstown. Like other colleges and universities, Shepherd benefited from the GI Bill, which brought a rush of veterans to the campus after the war.

President Ikenberry presided over this critical period as the college added majors and expanded its arts and sciences, humanities, and business programs while also strengthening its education degrees. Ikenberry also placed a strong emphasis on improvement of the college's physical plant and acquired land for future growth. These efforts brought accreditation from the North Central Association in 1950. In the summer of 1954, the college admitted African-American students for the first time.

President Butcher consolidated the gains of the Ikenberry era and recruited more professors with doctoral degrees. As enrollment expanded, he saw to the building of several new academic buildings, including a physical education complex (now known as the Butcher Center) and the Frank Center for Creative Arts, which enhanced the college's role as a regional cultural center. New programs included social work and nursing. The college also moved haltingly to diversify its student population and faculty.

By the beginning of the 21st century, Shepherd College had become a multipurpose liberal arts institution that served its region well as a center of learning and culture. Its role in helping host peace talks between Israel and Syria in January 2000 brought it international attention.

The new century brought important institutional changes as well. The Community and Technical College separated to establish its own campus in Martinsburg. That institution is known as Blue Ridge Community and Technical College. And in 2004 Shepherd College became Shepherd University.

David L. Dunlop, who had served as president for eleven years and who had led the effort for Shepherd to be named a university, retired in 2007. He was succeeded by Suzanne Shipley, who took over on June 29, 2007. In March 2015, Shipley announced she would be leaving for Midwestern State University in Texas. Sylvia Manning was selected to serve as the interim president. Since 2016, Shepherd alumna and hospital executive Dr. Mary Hendrix has served as the university’s 16th president.

Shepherd is home to the Robert C. Byrd Center for Legislative Studies. The center’s research and programs focus on the U.S. Congress, the Constitution, civic education, and democracy. The center has an archival section that contains the congressional papers of Byrd, Harley Staggers Sr., and Harley Staggers Jr.

Each summer, Shepherd hosts the four-week Contemporary American Theater Festival, which produces new American plays in rotating repertory. Many of its plays have later moved to other regional theaters and to off-Broadway in New York City.

The university's 2023-24 enrollment was 3,318.

Overall, by 2023, higher education in West Virginia was struggling financially, most clearly seen in West Virginia University’s budget cuts and the closing of Alderson Broaddus University. Shepherd found itself with a $6 million deficit. In November 2023, in what Shepherd and other schools label as “rightsizing,” the school’s board of governors eliminated five degree programs and eight minors or concentrations. The cuts eliminated 13 faculty positions, a master’s program in data analytics and information systems, and bachelor’s degrees in nutrition, computer and information technology, computer engineering, and data analytics. Some courses will be redesigned to create a bachelor’s in computer and information sciences with concentrations in cybersecurity and information science.

Shepherd University website