The redshirt senior was concerned that the competition for the starting spot with junior college transfer Matt Simms and incoming freshman Tyler Bray could end up costing him a chance to play.
"Nick's in his fifth year and of course has been trying to get on the field his whole career," Dooley said. "[He] just felt like it was too risky to go through another season because he just wants to play. We hate to lose Nick, but I certainly understand."
Stephens hasn't determined where he will play but will go to either a Football Championship Subdivision school or one in a lower division so that he won't lose his final year of eligibility.
The 6-foot-4, 231-pound Flower Mound, Texas, native started six games in 2008 as he and Jonathan Crompton failed to take control of the Vols' struggling offense in coach Phillip Fulmer's final season. Stephens backed up Crompton in 2009 in coach Lane Kiffin's offense.
He struggled last week in the Vols' first spring scrimmage, finishing 3-of-9 for 6 yards.
Stephens the third Tennessee player to leave since Dooley was hired in January to replace Kiffin, who left for Southern California. Running back Bryce Brown and offensive lineman Aaron Douglas have also let the program.
"I expected attrition certainly. Over the last three years there's been an inordinate amount of attrition, and to say it hasn't hurt the program is not being forthright," Dooley said. "What I hope is that we get our arms around it at some point and then we get a little stability, and I expect that to happen."
The Vols also have sophomore Nick Lamaison to bolster depth at quarterback this spring with freshman quarterback Nash Nance joining the squad in the fall as well.
Stephens' departure paves the way for junior college transfer Matt Simms, son of former New York Giants quarterback Phil Simms, to take control of the Vols' offense.
Simms will continue to compete with Bray for the starting job but appears to be somewhat ahead of the freshman because of his experience as a redshirt freshman at Louisville and at El Camino Community College in California.
He's also won the respect of his teammates because of his attitude.
"I like his whole swagger, his whole demeanor," senior wide receiver Gerald Jones said. "He's confident in himself, and he's confident in the players around him. He has a very strong arm, and I think his weakness right now is just getting used to the offense and timing."