Erasing 14 years of victories wipes out 111 of Joe Paterno's wins and strips him of his standing as the most successful coach in the history of big-time college football.
Penn State will also be banned from any bowl games or post-season games for four years and scholarships will be reduced from 25 a year to 15.
Other sanctions include five years' probation, and the NCAA also said that any current or incoming football players are free to immediately transfer and compete at another school.
The NCAA sanctions stopped short of delivering the "death penalty" of shutting down the sport.
The announcement came Monday morning during a press conference at NCAA headquarters in Indianapolis, Ind. The school was initially expected to be hit with at least a $30 million fine.
"The sanctions needed to reflect our goals of providing cultural change," NCAA President Mark Emmert said.
In a statement, the Paterno family acknowledged the NCAA's sanctions:
"This is not a fair or thoughtful action; it is a panicked response to the public's understandable revulsion at what Sandusky did."
The statement also said the sanctions "defame the legacy and contributions" of Paterno, and that the NCAA's decision lacked input from family or those who best knew Paterno.
Jerry Sandusky, a former Penn State defensive coordinator, was found guilty in June of sexually abusing young boys, sometimes on campus.
The sanctions come less than two weeks after a report accused coach Joe Paterno and other top university officials of concealing the child sex abuse allegations to avoid bad publicity.
Meantime, the school took down a Paterno statue outside Beaver Stadium over the weekend.
The Associated Press contributed to this report.