Brazilian utility player Juliano Belletti will also join the clear-out.
Cole, 28, who is with England at the World Cup, has been at the London club since 2003 but media reports said Chelsea balked at wage demands put at more than 100,000 pounds a week for one of their most popular players.
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Germany captain Ballack, ruled out of this month's tournament in South Africa due to an ankle injury, arrived at Stamford Bridge in 2006 with an estimated salary of around 125,000 pounds a week.
The Premier League and FA Cup winners thanked all three players for their contributions and said on their website they would become free agents on July 1.
Cole ruptured cruciate knee ligaments in January last year, keeping him out for eight months, and has endured an erratic season in and out of Chelsea's double-winning side.
A move away from Stamford Bridge, with a fistful of top clubs likely to be jostling for his signature despite his salary demands, is sure to revive his career.
Cole has already been linked to Manchester United, big-spending Manchester City, Liverpool, Arsenal and Tottenham Hotspur.
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Spurs manager Harry Redknapp brought Cole up through West Ham United's academy and is keen to renew the partnership with Tottenham looking forward to a Champions League campaign next season, although wage demands could be a stumbling block.
"I don't think it's going to be Tottenham that sign him but if he hasn't agreed a deal with somebody and he doesn't stay at Chelsea then we would be interested," Redknapp told BBC radio last week.
Cole told a news conference at England's training camp in South Africa that he was focused on the World Cup and would leave all negotiations with his agent.
"My future will sort itself out. It won't distract me. It has been going on for a while and it is a story to be told at another time," he said.
"I want to try and do my best for England over the next few weeks." A 6.6 million pounds signing from West Ham soon after Russian billionaire Roman Abramovich bought the West London team, Cole won three league titles with Chelsea and was the club's player of the year in 2007/08.
He played 282 times for the club and scored 40 goals. Ballack, ruled out of the World Cup after being injured in last month's FA Cup final win over Portsmouth, made 168 appearances and hit 25 goals after joining Chelsea on a free transfer from Bayern Munich.
Germany coach Joachim Low said the 33-year-old had received plenty of offers from other clubs.
"I know he would have liked to stay in London," said Low at his team's World Cup base in Pretoria. "But I think he can still play two or three more years at this high level.
