Alison Maria Krauss was born in Decatur, Illinois, to Fred and Louise Krauss. Her father was a German immigrant who came to the United States in 1952 and taught his native language. Her mother, of German and Italian descent, is the daughter of artists. Krauss grew up in the college town of Champaign, home to the University of Illinois at Urbana-Champaign.

Krauss made her recording debut in 1985 on the independent album, Different Strokes, featuring her brother Viktor Krauss, Swamp Weiss and Jim Hoiles. From the age of 12 she performed with bassist and songwriter John Pennell in a band called "Silver Rail", replacing their previous fiddler Andrea Zonn. Pennell later changed the band's name to Union Station after another band was discovered with the name Silver Rail. Pennell remains one of her favorite songwriters and wrote some of her early work including the popular "Every Time You Say Goodbye".  Later that year, she signed to Rounder Records, and in 1987, at 16, she released her debut album Too Late to Cry with Union Station as her backup band.  Krauss' debut solo album was quickly followed by her first group album with Union Station in 1989, Two Highways. The album includes the traditional tunes "Wild Bill Jones" and "Beaumont Rag", along with a bluegrass interpretation of The Allman Brothers' "Midnight Rider".  Krauss' contract with Rounder required her to alternate between releasing a solo album and an album with Union Station, and she released the solo album I've Got That Old Feeling in 1990. It was her first album to rise onto the Billboard charts, peaking in the top seventy-five on the country chart. The album also was a notable point in her career as she earned her first Grammy Award, the single "Steel Rails" was her first single tracked by Billboard, and the title single "I've Got That Old Feeling" was the first song for which she recorded a music video.

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Krauss' debut solo album was quickly followed by her first group album with Union Station in 1989, Two Highways.