I recently did a reading of that song, as part of a piece on how disturbing the whole album is:
The Centrifugue: Neutral Milk Hotel - In the Aeroplane Over the Sea
To paraphase, I think it is about how he is passing from innocense to adulthood, how his authority-figures collapses, and how he begins searching for new authoritative figures while dreaming of innocense. That is why he becomes a Christian, that is why he develops that unhealthy crush on Anne Frank. It's just an interpretation, though.