The NCAA announced the new settlement with the school Friday, weeks before a scheduled trial on the legality of the 2012 consent decree it will replace.
The new deal also directs a $60 million fine to address child abuse be spent within Pennsylvania and resolves that lawsuit.
The NCAA's board of governors approved the settlement, association spokesman Bob Williamssaid. The Penn State board approved it Friday afternoon.
"I want to thank Sen. (Jake) Corman, Treasurer (Rob) McCord, and the NCAA for their efforts to bring about an outcome that is in the best interest of Penn State," university president Eric Barron said in a statement. "I also want to thank the hard-working students, staff and faculty at Penn State who have ensured the highest level of compliance and ethics. Finally, I want to make it clear that we have a tremendous alumni community that cares a great deal for Penn State. It is my hope that this agreement will continue the healing process for all."
The announcement follows the NCAA's decision last year to reinstate the school's full complement of football scholarships and let Penn State participate in postseason play, and it comes just days after a federal judge declined to rule on the consent decree's constitutionality.
NCAA president Mark Emmertsaid the settlement did not serve to acknowledge any error on the part of the NCAA or signal victory for Penn State.
"We are not at all admitting that we didn't have the authority to impose the penalties," he said.
He said the NCAA acted in an unprecedented manner because of the severity of the situation.
"This was," Emmert said, "in all ways, an extraordinary circumstance. We all hope that we never find ourselves in a position like this."
Emmert declined to comment on a potential settlement with the Paterno family.
Joe Paterno's son, Jay, told ESPN's "Outside The Lines" that he is still looking for an explanation from the NCAA and that Emmert acted "as a rogue element."
"Well I think there needs to be some explanation as to why the NCAA, why the NCAA acted outside their jurisdiction," he said. "Why Emmert was able to act in the way that he did, and clearly the documents have proven he was not an honest broker in this situation. So I think there's still a lot more to explain as to why the reputation of Penn State University and certainly the reputation of athletic department that was a model program across the board, why that was allowed to be sacrificed in the alter of expediency in the panic of the day."
The objective in this case was always to improve the climate at Penn State, according to NCAA representatives. In that respect, Kansas State president Kirk Schulzsaid, the association's efforts have contributed to a resounding victory.
"I think the victors are those of us who are advocating for the children and can finally see this money put to good use," said University of South Carolina president Harris Pastides, a member of the NCAA's board of governors.
The NCAA said continuing the litigation would only delay the distribution of funds to sex abuse survivors.
"While others will focus on the return of wins, our top priority is on protecting, educating and nurturing young people," Pastides said.
The consent decree sprung from the scandal that erupted when Sandusky, a retired football assistant coach, was accused of sexually abusing boys, some of them on Penn State's campus.
It had eliminated all wins from 1998 -- when police investigated a mother's complaint that Sandusky had showered with her son -- through 2011, Paterno's final season as coach after six decades with the team and the year Sandusky was charged.
In September, the NCAA announced it was ending the school's ban on postseason play and restored its full complement of football scholarships earlier than scheduled. The Big Ten has yet to have discussions about reducing or removing any of its remaining sanctions against Penn State, including the removal of a bowl revenue share in 2015.
The restored wins include 111 under Paterno, who died in 2012, and the final victory of 2011, when the team was coached by defensive coach Tom Bradley. It returns Paterno's record to 409-136-3.
Paterno's 409 wins puts him ahead of former Florida State coach Bobby Bowden, who is No. 2 on the list with 377 wins -- and that is OK with the 85-year-old former Seminoles coach.
"I'm glad for him. I was self-conscious about that anyway," Bowden said. "Every time I would speak they would say, 'He's the winningest coach in I-A history.' I'd say, 'Yeah, after they took 100 away from Joe.'"
Now that Paterno's wins have been restored, some may wonder if his statue will return to campus. The nearly 7-foot tall, more than 900-pound statue was removed in 2012 and was placed in storage by the former university administration because it was seen as an obstacle to healing after the Sandusky child sex abuse scandal.
Barron said "there will be a time and place" to decide what to do about the statue.
On campus Friday night, hundreds of students celebrated the settlement with a subdued rally outside the university's administration building, followed by a march to the nearby Beaver Canyon apartment area. As many as 500 people joined the march.
The consent decree had also called for Penn State to provide $60 million to fight child abuse and combat its effects. The lawsuit scheduled for trial next month began as an effort by two state officials to enforce a state law that required the money to remain in Pennsylvania.
Under the settlement, the money will remain in Pennsylvania.
As part of the settlement, Penn State acknowledges the NCAA acted in good faith.
"We acted in good faith in addressing the failures and subsequent improvements on Penn State's campus," Schulz said. "We must acknowledge the continued progress of the university while also maintaining our commitment to supporting the survivors of child sexual abuse."
The 2012 consent decree was signed by Penn State's then-president, Rodney Erickson, a month after a jury convicted Sandusky and shortly after former FBI director Louis Freeh released the scathing results of a university-commissioned investigation into the Sandusky matter.
Its unprecedented penalties drew heated and sustained opposition by Penn State alumni and fans who argued the Freeh report was factually incorrect, defended Paterno's handling of the Sandusky scandal, noted it punished people who had nothing to do with Sandusky and said that the school's athletics program had been considered a national model.
In recent months, emails and other documents have been attached to court filings by the NCAA and the plaintiffs, Corman and McCord.
In one, an NCAA official described its pursuit of the penalties as "a bluff" and said asserting jurisdiction would be "a stretch." Other records documented that Penn State narrowly avoided a multiyear "death penalty" that would have suspended the college football powerhouse from playing at all.
Corman signed off on the settlement, the senator said at a news conference in Harrisburg.
"The fact of the matter was, an evil predator operated in our community for years and everyone missed it," Corman said. "The NCAA has surrendered. The agreement we reached represents a complete victory for the issue at hand."
McCord supports the agreement in principle, but he "intends to carry out a careful review of the details and language before he signs off," said his spokesman, Gary Tuma.
Sandusky was convicted in 2012 of 45 counts, and he is now serving a 30- to 60-year prison sentence. He maintains his innocence.
Paterno's surviving family members and others had been pursuing another lawsuit over the consent decree. That lawsuit was narrowed by the judge so that it now includes the family, former assistant coaches Jay Paterno and Bill Kenney, and former trustee Al Clemens. Former players, faculty and trustees were removed as plaintiffs.
In a statement, Paterno's family called the announcement of a settlement "a great victory for everyone who has fought for the truth in the Sandusky tragedy."
They said: "This case should always have been about the pursuit of the truth, not the unjust vilification of the culture of a great institution and the scapegoating of coaches, players and administrators who were never given a chance to defend themselves."
Michael Boni, a lawyer for one of the victims who testified at Sandusky's trial, said he favored restoring Penn State's scholarships and bowl eligibility last fall but does not believe Paterno's victories should be reinstated.
"To completely restore, in a sense, Joe Paterno's heretofore pristine reputation, I regret that," Boni said. "He did a world of good, but he made a huge, huge error in judgment in helping cover up Sandusky's pedophilia, and even posthumously I think that has to be recognized."
Boni praised Penn State in its dealings with the victims but said he sensed a "shift in the tide" later.
"There was a movement away from what I thought was a genuine mea culpa on the part of Penn State, having accepted the NCAA sanctions, and one toward, 'Why did we cave so easily?' That was disappointing," he said.
Mike Guman, a Penn State running back from 1976 to 1979, called the deal "a step in the right direction" to vindicating Paterno. The late coach "was a great leader, a great coach and a great man," Guman said. "He needs to be looked upon in that light."
The deal infuriated some Penn State alumni who have long contended the NCAA had no authority to punish Penn State over the Sandusky scandal and who were in favor of a trial.
Information from ESPN.com's Mitch Sherman and The Associated Press was used in this report.
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