First-year coach Josh Heupel announced the decision during a news conference Monday, citing Milton's skills and decision-making.
In April, Milton transferred to Tennessee from Michigan, where he began last season as the starter before he was eventually benched.
In five appearances with the Wolverines, Milton completed 80 of 141 passes for 1,077 yards, four touchdowns and four interceptions.
Asked whether he might play two quarterbacks, Heupel said he believes that "the strength of one position can never be one guy."
"All of them have to prepare like the starter," he added. "I anticipate Joe getting handed the ball first and playing his butt off in a really good way."
Heupel, who took over the program in January after three seasons as head coach at UCF, said both Hooker and Bailey handled the decision "in a real positive way."