The 23-year-old spent part of the 2016-17 campaign on loan at the German club and became a regular in the side, making 21 appearances until his season was cut short by a cruciate ligament tear while on Africa Cup of Nations duty with Ghana.
Baba has not played since that upset in the first game of the competition in January 2017, but Chelsea and Schalke have confirmed he will make his return to senior football with another stint in the Bundesliga.
The former Greuther Furth and Augsburg player returns to Gelsenkirchen for 18 months, with Domenico Tedesco's side sitting level on points with Bayer Leverkusen as the sides closest to league leaders Bayern Munich.
Baba has featured 23 times for Chelsea's first-team since his arrival in 2015 and is contracted to the club until 2020.
Chelsea have also sent Brazilian attacking midfielder Nathan to Portuguese Primeira Liga side Belenenses.