The rapid integration of artificial intelligence (AI) in educational settings has transformed traditional teaching and learning processes. In Iraq, higher education institutions are increasingly adopting AI-based learning tools, including intelligent tutoring systems, adaptive learning platforms, and AI-driven feedback mechanisms. This theoretical study examines the psychological impact of AI-based learning tools on university students’ motivation and self-efficacy. Drawing upon recent literature, this paper highlights both the potential benefits and challenges of AI integration in higher education. Key findings indicate that AI can enhance student motivation through personalized learning pathways and timely feedback while fostering self-efficacy by allowing students to monitor their progress and mastery of learning objectives. However, the study also discusses psychological challenges such as technology-induced anxiety, over-reliance on automated systems, and reduced human interaction. Recommendations for educators, policymakers, and future researchers are presented to optimize AI adoption in the Iraqi higher education context while addressing students’ psychological well-being.