Ms McDougal had signed a $150,000 deal with AMI tabloid The National Enquirer which gave them exclusive story rights.
She filed a lawsuit in California last month to be released from the so-called "catch and kill" deal.
Ms McDougal says she had a 10-month affair with Mr Trump starting shortly after the birth of his son Barron.
She previously apologised to First Lady Melania Trump about the relationship in an interview with CNN's Anderson Cooper.
The president has denied any affair.
The former model's lawyer, Peter Stris, reportedly described the settlement in an interview as a "total win".
"We got everything we were fighting for - she got out of the contract, gets the life rights back and owes AMI nothing more."
Under the terms of the settlement, Ms McDougal can keep the $150,000 she originally received, and has full rights to her own story.
However, if she sells or licenses the story to another party within the next year, AMI is entitled to up to $75,000 of any profit she receives.
Ms McDougal claims she was misled into signing the deal in August 2016, months before the election of President Trump.
She claims at the time she thought the contract was a work agreement, and did not realise it would penalise her for speaking to other media.
Moreover, the former model told CNN that her lawyer for the AMI deal, Keith Davison, was allegedly in contact with Mr Trump's personal attorney Michael Cohen.
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