The 22-year-old spent last season on loan at League One side Burton, making 35 appearances in all competitions.
Collins, who has also spent time on loan at Forest Green, won the Uefa Youth League and FA Youth Cup with Chelsea in the 2014-15 season.
"You just want to keep progressing as a footballer and if you look at my stats, it shows I have," Collins said.
He told the Barnsley website: "The vision here is good, there's a good group of lads here who are hungry and play the right way."
Collins' contract includes the option for the Tykes to extend his stay for another year at Oakwell.