The University of Wolverhampton settled after a preliminary hearing had been adjourned until October.
Lawyers said mature student Mike Austen, 54, had struck a blow for all students who had to pay for their education.
Mr Austen - a retired airline pilot who was representing himself - began his action for breach of contract at the end of his first year of study last summer.
He claimed the course had failed to live up to the "inflated" picture it gave of itself in its prospectus.
"The university made claims about its standards and it represented itself as a place of 'learning excellence'," Mr Austen said.
"It said it delivered courses to the highest possible standards and made claims about its law course too.
"The most laughable was a CD Rom which the university published with a student saying 'I was offered Oxford, I was offered Cambridge, but it had to be Walsall' [where the university has a campus]," said Mr Austen.
But Mr Austen said lecture halls were overcrowded and students were often turned away from tutorials.
"The exams were appalling, some of them - we were set an exam where twice the invigilator had to interrupt to clarify what the paper actually meant."
Mr Austen, who was born in England but lived in Australia until 1998, said he was unfamiliar with the British university system and had assumed universities were of the same standard.
"I took them at their word," he said.
Mr Austen will now restart his law studies this autumn at a leading UK university.
No admission of liability
The university - formerly a polytechnic - said it had settled "with no admission of liability".
"While the University of Wolverhampton acknowledges that it has reached an out-of-court settlement with Mr Austen, it has done so with no admission of liability," a statement said.
"Indeed, having carried out an appropriate and thorough investigation, the university is satisfied with the integrity of its processes.
In reaching this settlement, the university has had cause to consider most carefully the costs of settlement in comparison to the costs of defending this particular case."
The university has campuses in Wolverhampton, Walsall and Telford and caters for 20,000 students.
It specialises in technology and information and communications technology.
'Overcrowding'
The National Union of Students (NUS) said students had the right to expect high standards.
"This case highlights the problems of overcrowding and under-resourcing that the NUS is all too aware of," said NUS president Mandy Telford.
"Students are getting into record levels of debt to pay for their education and are entitled to high quality provision," she said.