I know this post is very old and has been marked as answered. But maybe I can save some time for people out there that tries the solution(s) mentioned above.
I am using VS2019 and as shown by AlanN and Sky Sanders, one is able to define the custom type, by entering either the full name manually, or by picking it from the list. The latter only works, when it was defined in another referenced assembly (don't forget to build it beforehand), which is a known limitation as explained here: DocMicrosoft: Create Application Settings using the designer.
My whole point of doing it that way was to give the user fixed options so that he does not have to check which strings are allowed and which are not. The problem is that the options do not consistently show up. Sometimes, after compiling your programm, you will not see the options anymore; they are gone. Sometimes, after restarting Visual Studio, they are back again. This problem was already stated by Sean in another stackoverflow post here.