Language and thought dysfunction are central to the schizophrenia syndrome. They are evident in the major symptoms of psychosis itself, particularly as disorganized language output (positive thought disorder) and auditory verbal hallucinations (AVHs), and they also manifest as abnormalities in both high-level semantic and contextual processing and low-level perception. However, the literatures characterizing these abnormalities have largely been separate and have sometimes provided mutually exclusive accounts of aberrant language in schizophrenia. In this review, we propose that recent generative probabilistic frameworks of language processing can provide crucial insights that link these four lines of research. We first outline neural and cognitive evidence that real-time language comprehension and production normally involve internal generative circuits that propagate probabilistic predictions to perceptual cortices - predictions that are incrementally updated based on prediction error signals as new inputs are encountered. We then explain how disruptions to these circuits may compromise communicative abilities in schizophrenia by reducing the efficiency and robustness of both high-level language processing and low-level speech perception. We also argue that such disruptions may contribute to the phenomenology of thought-disordered speech and false perceptual inferences in the language system (i.e., AVHs). This perspective suggests a number of productive avenues for future research that may elucidate not only the mechanisms of language abnormalities in schizophrenia, but also promising directions for cognitive rehabilitation.