a function ends the moment a return keyword is reached, this currently happens in the first iteration of your loop. Change the indent of return so the whole loop can run.
the function call should be outside the function:
print "function call indention"
# no indent, so the function call is outside the function
you should declare the text and word variable before the function call
okay, so lets do the one the exercise suggested:
for x in word:
censor("hey hey hey","hey")
as you can see,
x will hold the words in word one by one, but this is read only,you can't use it for manipulation. I don't see why you overwrite
*, it doesn't make sense
if word in text:
doesn't make much sense either, this means that if the word which requires censoring in the sentence, this condition is always true, so it would censor all words.
Really take a minute to think over the logic of your program, i would almost recommend starting again