Schalke signed Roman Neustaedter year-old midfielder year deal this summer.
Neustaedter, a former Germany youth international, has a contract through the end of the current season, but will follow teammate Marco Reus out of Gladbach during the offseason.
"We're delighted the deal has gone through," Schalke general manager Horst Heldt said. "Roman is a young German player and comes on a free transfer.
"Over the last 18 months he's been really consistent in the holding midfield position. You hardly notice him on the pitch but he does a really good job and is an assured passer of the ball."
Reus recently agreed to a switch to Borussia Dortmund, and Neustaedter's move will leave Monchengladbach without its top two midfielders next season.
Monchengladbach hosts first-place Bayern Munich on Jan. 20 when the Bundesliga returns from its winter break. Gladbach, which is four points off the pace in fourth place, defeated Bayern 1-0 in Munich earlier this season.