The five-star recruit has missed the last five games due to injuries. He hurt his ankle in the season opener against Appalachian State and suffered a leg injury during practice four weeks later. He has eight tackles in three games.
Hoke made the decision after discussing it with Peppers and his family.
"He's taking care of himself [physically]," Hoke said. "He's been great with treatments and rehab and all those things. He's doing a tremendous job in school right now academically and he's excited about whenever he can get back on the field."
The medical redshirt will give Peppers four more years of college eligibility.
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Prior to the season, Peppers was listed as the top cornerback in the Class of 2014 by Rivals.com and the third-best prospect by 247Sports.com.
Michigan is currently 4-5 and travels to Northwestern (3-5) on Saturday.
- Danielle Zhu