The origin of the term's been debated forever but from the indiana historical society,
"The distinguished Hoosier writer, Meredith Nicholson (The Hoosiers) and many others have inquired into the origin of Hoosier. But by all odds the most serious student of the matter was Jacob Piatt Dunn, Jr., Indiana historian and longtime secretary of the Indiana Historical Society. Dunn noted that "hoosier" was frequently used in many parts of the South in the 19th century for woodsmen or rough hill people. He traced the word back to "hoozer," in the Cumberland dialect of England. This derives from the Anglo-Saxon word "hoo" meaning high or hill. In the Cumberland dialect, the word "hoozer" meant anything unusually large, presumably like a hill. It is not hard to see how this word was attached to a hill dweller or highlander. Immigrants from Cumberland, England, settled in the southern mountains (Cumberland Mountains, Cumberland River, Cumberland Gap, etc.). Their descendents brought the name with them when they settled in the hills of southern Indiana."