Kolasinac has had first team opportunities hard to come by under Mikel Arteta this season, having featured just once in the Premier League to date.
The Bosnia-Herzegovina international has however made seven appearances in the EFL Cup and Europa League.
Kolasinac had his formative years at Schalke before leaving for Arsenal in the summer of 2017 and has made 113 appearances for the Gunners.
Arsenal technical director Edu said: "Sead needs to be playing regularly, so we have decided together that a move back to Germany with Schalke will benefit him at this moment.
"We will be keeping in close contact with Sead, and wish him huge success for the remainder of the season with Schalke."
Schalke 04 have just four points from their 13 Bundesliga games this season and are without a win in their last 29 top flight matches.
The Bundesliga’s bottom club recently appointed their fourth manager of the season in the shape of former Tottenham Hotspur boss Christian Gross.
"I'm happy and proud to be wearing the royal blue of Schalke 04 once again," Kolasinac told Schalke's website. "The club is currently in a difficult situation.
"Over the coming weeks and months I want to do my part in order to help us pick up as many points as possible.
"We will manage to stay up together, I'm 100 per cent convinced of it. I'm also very happy to be reunited with several familiar faces, both in the team and backroom staff.
"I never lost touch with FC Schalke 04. Returning to Gelsenkirchen was something I really wanted to do."
