Background: Psychoactive substance use is a major public health concern globally. Though youth attending higher education institutions are considered particularly vulnerable to psychoactive substances, there is a paucity of evidence in Ethiopia. We aimed to determine the prevalence of psychoactive substance use, factors associated with psychoactive substance use and level of dependence among Mekelle University undergraduate students in Ethiopia. Methods: An institution-based quantitative cross-sectional survey was used to randomly (using multistage sampling) invite 1220 undergraduate students in April and May 2017 to participate. Multinomial logistic regression was used to identify factors associated with psychoactive substance use. Level of dependence was determined using the WHO’s Alcohol, Smoking and Substance Involvement Screening Test classification. Results: Among the eligible students approached, 1214 participants completed the survey, which yields a 99.5% response rate. The lifetime prevalence of psychoactive substance use was 66.5% (95% Confidence Interval (CI) = 64% to 69%) while the current prevalence was 49% (95% CI = 46% to 52%). A history of, but not current, psychoactive substance use was reported by 18%, while 33.5% reported never having used psychoactive substances. The current prevalence of alcohol use was 35.5%, tobacco 7.8% and khat 5.7%. Of the current users, 17% (95% CI = 14% to 20%) were at a moderate to high risk of dependency. Being over 21 years of age (adjusted odds ratio (AOR) = 1.6, 95% CI = 1.37 to 2.25), male (AOR = 3.13; 95% CI = 2.26 to 4.34), living in urban areas (AOR = 2.39, 95% CI = 1.77 to 3.23), an Orthodox Christian (AOR = 7.55, 95% CI = 4.56 to 12.48), and being in their 3rd year (AOR = 2.3, 95% CI = 1.49 to 3.55), 4th year (AOR = 2.0, 95% CI = 1.2 to 3.51) and 5th year (AOR = 4.0, 95% CI = 2.81 to 7.67) at university were associated with currently using psychoactive substances. Being male and Orthodox Christian was associated with being an ex-smoker. Conclusions: Approximately half of Mekelle University undergraduate students were using psychoactive substances with almost one in five at risk of dependency. The likelihood of use increased with seniority. Evidence-based strategies are needed to prevent school-aged children from using psychoactive substances and university students becoming dependent on substances. Interventions designed to stop current psychoactive substance use may also have promise for reducing dependency.