The settlement Friday over the 2009 stop of Nicholas George at Philadelphia International Airport also includes more police training.
The Justice Department is funding the settlement, though a US court cleared federal agents of liability over their 30-minute questioning of George.
George says city police separately detained him for more than four hours, sometimes handcuffed. A lawyer for the city says the stop was justified.
George was flying back to Pomona College from his Philadelphia-area home and had the flashcards in his pocket to study.