"Tonight's agreement is in the best interests of the university, and I am pleased this issue has been resolved," President Robert Barchi said in a statement after spending the day fielding questions from state lawmakers over the school's basketball scandal.
Barchi fired Rice on April 3 after the coach was caught on video hitting, kicking and taunting players with anti-gay slurs at practice.
Under his contract, Rice was owed a little more than $1 million for the next two years at 75 percent of his contract amount, plus an additional $100,000 for completing the 2012-13 season.
Barchi told a New Jersey Assembly budget panel earlier Thursday that he would not approve a hefty payout to the disgraced coach.
"My personal position is that the university was damaged by his actions," he said. "My personal position is there was conduct there that was unethical, not acceptable."
Gov. Chris Christie, who is a lawyer and father of a college athlete, also has said Rice should have been fired for cause.
Barchi said severances worth between $420,000 and $1.2 million had been finalized for two other officials caught up in the scandal. The university's lawyer and athletic director both resigned in what Barchi termed mutual separation agreements.
Rutgers took steps last week to publicly address fallout from the scandal, announcing an independent review and hiring a respected former state attorney general as the school's new top lawyer.
The measures were intended to get the university back on track during a time of transformation. Rutgers is absorbing most parts of the University of Medicine and Dentistry of New Jersey, which gives it a coveted medical school, and is working on a strategic plan for how to catapult the school to be among the highest regarded public universities in the nation.
The university, set to enter the Big Ten Conference, is reported to have reached a tentative agreement with Los Angeles Lakers assistant Eddie Jordan to take over as coach of the scandal-marred program.
The video of Rice, taken at practices during his three years at Rutgers and aired on ESPN, showed numerous clips of the coach firing basketballs at players, hitting them in the back, legs, feet and shoulders, grabbing players by their jerseys and yelling obscenities and using anti-gay slurs.
Barchi was called to the Statehouse in Trenton on Thursday to answer questions as lawmakers reviewed $487 million in proposed aid to the state's largest university. Hours later, the settlement was announced.