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He was immediately loaned back to Selhurst Park for the end of the 2012-13 season and helped the club achieve promotion to the Premier League.
However, he failed to nail down a place in David Moyes's squad last season and spent the second part of the campaign at Cardiff City.
After failing to make his impression on new United boss Louis van Gaal during the summer, the 21-year-old is set to move back to the club where he came through the ranks as a teenager after agreeing the deal on Wednesday.
Palace hired Neil Warnock as manager on Wednesday to replace Tony Pulis, who left the club on the eve of the Premier League season.
Warnock previously managed the side between 2007 and 2010 and left amid financial difficulties and a 10-point Football League deduction for going into administration.