Grahn was born in Skokie, Illinois, to a Jewish mother and a Lutheran father. Her parents were both involved with their local community theater in Skokie. Grahn's first stage appearance was as a pony in a community production of Oklahoma! At Niles North High School, she played "Daisy Mae" opposite future Broadway actor Gregg Edelman in the school's production of Lil' Abner. As a freshman at the University of Illinois at Urbana-Champaign, Grahn landed her first credited role, as Mimi in Guys and Dolls at the Goodman Rep Theater, 1973–74 season.