Sister Madeleine Miller, 37, a theology teacher, said she was shocked to learn that the habit was banned in public schools after she applied to work for Norfolk Public Schools.
Miller said a school administrator told her the district would be happy to hire her, but she couldn't wear her habit in class.
The law - which is not widely applied in Nebraska - states that teachers should not wear any sort of religious clothing.
"I could have been arrested, jailed, fined or had my license taken away if I had tried to teach," Sister Miller told Associated Press on Tuesday.
State lawmakers have said that they are looking to end the ban, which was passed in 1919 under pressure from the anti-Catholic Ku Klux Klan.
Pennsylvania and Nebraska are the only states to ban teachers from wearing religious clothing although 36 states have previously had similar legislation.