The order was brought in by previous US president Barack Obama, with the aim of preventing discrimination.
It applies to bathrooms and changing facilities in publicly-funded schools, and though the guidelines weren't legally binding there were threats that institutions would lose their funding if they defied them.
LGBT campaigners welcomed the move, saying it makes transgender people feel safer when using them.
But it prompted legal challenges from 13 different US states, who argued that the matter should be decided locally rather than federally.
Christian charity Alliance Defending Freedom and Catholic dioceses also brought legal challenges against the guidelines.
Some Christians believe the guidelines wrongly affirm the idea that gender is chosen rather than God-given.
A White House spokesman said: "As President Trump has clearly stated, he believes policy regarding transgender bathrooms should be decided at the state level," the White House said in a statement.
"The joint decision made today by the Department of Justice and the Department of Education returning power to the states paves the way for an open and inclusive process to take place at the local level with input from parents, students, teachers and administrators."
