The Folklore Institute at Indiana University began as an eight-week program in the summer of 1942 under the directorship of Professor Stith Thompson. From June 29 to August 22 of that year residential and visiting faculty taught courses, which carried university credit, on a number of topics. Course topics ranged from an introductory course on folklore to field collecting and recording to the folk tale and similar forms. Others covered folk song and folk music as well as Native American folklore.

The Folklore Institute grew into a stable research branch of Indiana University's College of Arts and Sciences in 1949 and received departmental status with an independent faculty in 1963, however the Graduate School first listed M.A. and Ph.D. degrees in Folklore for the academic year of 1949-1950. Since the academic year of 1971-1972 the Institute has offered an undergraduate degree in folklore as well. The Institute has also had a long history with research and teaching interests in ethnomusicology. In 2000 the Ethnomusicology Institute was created and merged with the Folklore Institute to become the Department of Folklore and Ethnomusicology, which now offers undergraduate and graduate degrees in both fields.