The Everton defender made 12 appearances last season as back-up to Seamus Coleman and also as a makeshift left-back when Lucas Digne and Leighton Baines were unavailable.
The 22-year-old joined the club’s academy when he was nine and has made 40 first-team appearances since making his debut in 2016.
He has enjoyed previous loan spells at Wigan in 2015 and Oxford in 2016.
Schalke announced the signing with a South Park inspired tweet with the words: “Oh my god! They signed Kenny! #s04 #WelcomeKenny.”
The right-back is currently on international duty with England as the prepare for the European Under-21 Championships, which start this weekend.
Once the tournament finishes, Kenny will join up with the Bundesliga club’s new manager, former Huddersfield boss David Wagner.
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