A third-generation Hispanic American, Castillo was born in Los Angeles, and raised there by her mother, who had not finished eighth grade. She cites watching her mother's struggles as a source of her understanding of the importance of education. "Growing up and seeing your parent experience that," she told Northwest Education in a 2006 interview, "you really do make that connection between education and opportunity."

By the mid-1970s, Castillo was working as a secretary in the Affirmative Action Office of Oregon State University (OSU) for its director, Pearl Gray. Gray urged her to consider pursuing a college degree, which she did, graduating OSU in 1981 with a BA in communications.

In 1982, began an award-winning broadcast journalism career, joining the reporting team at Oregon Public Radio, and became a reporter for KVAL-TV in 1982. As a journalist, she was frequently called upon to cover or comment on Oregon government and politics.

Castillo was the first Hispanic woman be seated in the Oregon Legislative Assembly, and would later become the first to gain election to a statewide office.

She was first appointed by the Lane County commissioners to fill a vacancy in the Oregon State Senate in 1996, winning re-election in 1998. She became vice-chair of the Education Committee, dealing with such issues as charter schools, teacher tenure and school reform, and was selected an Assistant Democratic Leader for the 1999 and 2001 legislative sessions. During her tenure as a State Senator, she worked to bolster funding for public schools, foster innovation in school programs, and remove barriers to achievement.

In 2001, she gained national press attention when she and State Senator Margaret Carter (D-Portland) filed suit in U.S. District Court to force the Census Bureau to disclose its adjusted statistical count, which they suspected would reveal an undercount of as many as 43,000 Oregonians. They further estimated the cost to the State of Oregon in lost federal funding for social and educational programs over ten years at US$16 million. Judge James A. Redden ruled in favor of the disclosure, and the decision was upheld in 2002 on appeal by the Census Bureau.

Castillo was elected Superintendent of Public Instruction, a nonpartisan position, in the May, 2002, Oregon primary election. She ran against the incumbent, Stan Bunn, a Republican whose administration had been marred by an ethics scandal, and Rob Kremer, a longtime charter school proponent. She received a majority of votes in the May primary, avoiding a runoff in the November general election.

She was sworn into office on January 6, 2003 to a four-year term to oversee a State Education Department serving more than a half million students in over 1,200 public schools at a time when Oregon had experienced the worst budget shortfalls since World War II. She also faced turmoil within the agency, demoralized by her predecessor's alleged mismanagement and ethics violations, prompting a group of department employees to present the newly elected superintendent with a petition of grievances in a surprise public confrontation less than three weeks after taking office.

Oregon's school funding problems were sufficiently dire that Portland teachers agreed to working ten days without pay, and serious consideration was given to reducing the school year by nearly a full month. The situation received national attention, due in no small part to a series of Doonesbury cartoon strips lampooning the situation. "Oregon is the poster child of what is going on in the states because of declining revenues," Jan Chambers of the Oregon Education Association is quoted as saying, continuing, "It's ghastly here."

In a position which has little control over school policies and curricula, which largely remain the province of local school districts, nor school funding, which is solely dependent upon local levies and state support levels set by the legislature, Castillo quickly focused her attention on six priorities for her administration: