The rapid integration of digital technologies into higher education has created new opportunities to improve both academic performance and students’ psychological well-being. Among these technologies, Artificial Intelligence (AI) and Virtual Reality (VR) have emerged as transformative tools capable of creating adaptive and immersive learning environments. Engineering students frequently experience learning anxiety due to complex theoretical concepts, laboratory risks, performance pressure, and limited access to practical resources. AI-driven virtual reality offers a promising solution by providing personalized simulations, real-time feedback, and safe environments for repeated practice. This paper explores how AI-enhanced VR systems can reduce learning anxiety among engineering students while improving confidence, motivation, and academic engagement. The study examines applications in virtual laboratories, mechanical simulations, electrical systems training, and problem-solving environments. In addition, pedagogical, psychological, and technical challenges are discussed. Findings suggest that AI-driven VR significantly lowers anxiety levels by promoting experiential learning, reducing fear of failure, and allowing students to practice without real-world consequences. Recent higher-education research also supports that AI-VR improves engagement, confidence, and learning retention in adaptive environments.