The linebacker led the Irish in tackles each of the past three seasons, including 103 this year when top-ranked Notre Dame went undefeated in the regular season.
The other finalists were Arthur Brown of Kansas State, Jarvis Jones of Georgia and Chase Thomas of Stanford.
It was the seventh national award for Te'o in a week. He was runner-up for the Heisman Trophy on Saturday night in New York.
The award is named for Hall of Fame defensive back Ronnie Lott and goes to a player with strong academic work, community involvement and team leadership.
Notre Dame will receive $25,000 for its general scholarship fund.
Former Secretary of State Condoleezza Rice was the speaker at Sunday night's banquet in Newport Beach.
Luke Kuechly of Boston College won last year.