It will be called Starkville MSU Area Rapid Transit or SMART.
"This is a long term commitment between the federal government, the Mississippi Department of Transportation and Mississippi State University to manage this transit system," said MSU President Mark Keenum.
Leaders plan to offer SMART free to riders during the first year of operation. The buses should be up and running next fall.
The transportation system will allow residents to access grocery and retail stores, housing, medical facilities and the campus.
About $800,000 of the $2 million will be used to pay for transit operations, including drivers as well as fuel and maintenance costs. The remaining portion will supply up to 12 buses for the routes.
"We're a growing a university. The community at large is growing and expanding, and this hopefully will cut down on congestion, not only on campus but in the city," Keenum said.
Mayor Parker Wiseman said MSU is the largest industry in the city of Starkville.
"You've got 4,000 people who move from campus to somewhere else in the community every day," Wiseman said.