Donald Trump was being sued by former students who paid $35,000 for real estate “secrets” from his “hand-picked” instructors.
He had repeatedly said he would not settle the class-action lawsuits.
Attorney General Eric Schneiderman said the settlement was a “stunning reversal” by Donald Trump and a “major victory” for victims.
However, Donald Trump’s lawyer Daniel Petrocelli said his client was pleased with the outcome, saying “he was willing to sacrifice his personal interests, put this behind him, and move forward”.
The president-elect faced three fraud lawsuits – which alleged the school misled students and failed to deliver on its promises – in California and New York.
A trial in one of the cases had been due to begin in San Diego on November 28, although Donald Trump’s lawyers had attempted to delay the case.
Attorney General Eric Schneiderman said in a statement: “Today’s $25 million settlement agreement is a stunning reversal by Donald Trump and a major victory for the over 6,000 victims of his fraudulent university.
“The victims of Trump University have waited years for today’s result and I am pleased that their patience – and persistence – will be rewarded by this $25 million settlement.”
Eric Schneiderman, who Donald Trump has attacked as a “lightweight”, had sought a $40 million payout from Trump over the university, which closed in 2010.
He called Trump University a “fraud from beginning to end” in July, adding that the organization used “false promises to prey on desperate people”.
District Judge Gonzalo Curiel, who is presiding over the two California cases, had been urging both sides to settle out of court.
In June, Donald Trump said: “I will win the Trump University case. I already am, as far as I’m concerned.
“I could settle that case. I could have settled that case. I just choose not to.”
Trump University promised students the opportunity to learn from “hand-picked” teachers, that actually were not chosen by Donald Trump himself.
Eric Schneiderman alleged that the closest students ever got to the real estate mogul was having their photo taken beside a cardboard cutout of him. He also said that Donald Trump personally pocketed about $5 million in the “scheme”.
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