The lawyers say that under Thursday's ruling, Lara Alqasem will be released from detention immediately and allowed to study at Hebrew University, where she had been registered for classes.
She issued the following statement through her lawyers: "I'm relieved at the court's decision and am incredibly grateful for the work of my incredible and tireless lawyers...as well as the support of my family and friends", adding that she "will be happy to say more when I've had a chance to rest and process".
Alqasem was president of a chapter of Students for Justice in Palestine - which supports the Boycott, Divestment and Sanctions (BDS) campaign against Israel - when she studied a degree at the University of Florida.
"The Supreme Court's decision is a victory for free speech, academic freedom, and the rule of law".
The government had argued it had the right to prevent Ms Alqasem from entering based on a controversial 2017 law which bars entry of foreign nationals who support boycotts against Israel over its treatment of the Palestinians.
Israeli authorities detained Alqasem at Ben-Gurion International Airport on October 2.
The interior ministry's decision to bar her from entry, the court ruled, "was not within the bounds of reason and is revoked".
During her hearing, the Supreme Court justices asked Alqasem's lawyer whether the student supported a boycott of Israel, Haaretz reported.
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The case was one of the first legal tests of the Israeli government's attempts to bar foreigners who "knowingly issues a public call for boycotting Israel".
"I'm relieved at the court's decision and incredibly grateful for the work of my awesome and tireless lawyers Yotam Ben Hillel and Leora Bechor as well as the support of my family and friends", she told the Haaretz newspaper upon her release.
Alqasem reportedly said in a statement that she was "relieved at the court's decision" and thanked her lawyers, family and friends.
In its ruling, the Supreme Court said the state's evidence was not enough to justify its use of the anti-boycott law.
"If this is indeed the case, then this is an extreme and unsafe step that could lead to the disintegration of the pillars on which democracy is built in Israel", it added.
Israel's Strategic Affairs Ministry, which spearheads the government's efforts against the boycott campaign, describes the group as an extremist organization and says BDS aims to delegitimize or even destroy the Jewish state. The Anti-Defamation League argued that Alqasem should be allowed to stay and study in Israel.
"Lara has ensured that no one else should be denied the right to enter Israel based on sloppy Google searches and dossiers by shadowy smear groups", they added, referring to the sources of the state's argument that Alqasem supports the BDS movement.
Interior Minister Arie Deri, under whose ministry the immigration authority falls, lashed out at the court in response.
"Lara's case proves that thought-policing has no place in a democracy", she said. In the USA would she also dare to act against the state and demand to remain and study there?