A facile, economical, and one-step hydrothermal method was used to prepare highly luminescent nitrogen-doped carbon quantum dots (N-CQDs) with chitosan as both carbon and nitrogen sources. The as-prepared N-CQDs have an average size of 2 nm and exhibit excitation wavelength-dependent fluorescence with a maximum excitation and emission at 330 and 410 nm, respectively. Furthermore, due to the effective quenching effect of Fe3+ ions, the prepared N-CQDs can be used as a fluorescent sensor for Fe3+ ion-sensitive detection with a detection limit of 0.15 μM. The selectivity experiments revealed that the fluorescent sensor is specific to Fe3+ even with interference by high concentrations of other metal ions. Most importantly, the N-CQD-based Fe3+ ion sensor can be successfully applied to the determination of Fe3+ in real water samples. With excellent sensitivity and selectivity, such stable and cheap carbon materials are potentially suitable for the monitoring of Fe3+ in environmental application.