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US President Donald Trump's government has dropped its plans to deport international students whose courses move fully online because of the coronavirus pandemic.
The U-turn comes just one week after the policy announcement.
Harvard University and the Massachusetts Institute of Technology sued the government over the plan.
District Judge Allison Burroughs in Massachusetts says the parties have come to a settlement.
Foreign students were told last week that they would not be allowed to stay in the US this autumn unless they switched to a course with in-person tuition.
The US Immigration and Customs Enforcement (ICE) agency had said people could face deportation if they did not comply with the rules.
Large numbers of foreign students travel to the US to study every year and are a significant source of revenue for universities.
Harvard announced recently that, because of concerns over the virus's spread, all course instruction would be delivered online when students return for the new academic year.
The Student and Exchange Visitor Program, which is run by ICE, had permitted foreign students to continue with their spring and summer 2020 courses online while remaining in the country.
But on 6 July the agency said foreign students who remained in the US while enrolled in online courses and failed to switch to in-person courses could face "immigration consequences including, but not limited to, the initiation of removal proceedings".
The policy applied to holders of F-1 and M-1 visas, which are for academic and vocational students. The state department issued 388,839 F visas and 9,518 M visas in the fiscal year 2019, according to the agency's data.
According to the US commerce department, international students contributed $45bn (£36bn) to the country's economy in 2018.
