US President Joe Biden will cancel up to $10,000 (£8,474) in federal student loans for millions of Americans who earn less than $125,000 each year.
Mr Biden will also forgive $20,000 of debt for students on Pell Grants, which applies to those in greatest financial need.
“People can finally crawl out under that mountain of debt,” he said.
An estimated 43 million Americans owe a combined total of $1.6tn in federal student debt.
Nearly one-fifth owe less than $10,000.
The temporary student loan pause, first put in place in March 2020, will also be extended a final time until 31 December of this year.
Speaking from the White House on Wednesday, Mr Biden said his plan would give more “breathing room” to working and middle class families.
“The burden is so heavy that even if you graduate you may not have access to the middle class life that the college degree once provided,” he said, recalling the shame his car salesman father felt when he struggled to pay for his children’s education.
About one-third of borrowers have student debt but no degree, Mr Biden said. “The worst of both worlds.”
The announcement follows more than a year of intense internal White House debate and mounting pressure from progressive Democrats. Top Democrats Senate Majority Leader Chuck Schumer of New York and Senator Elizabeth Warren of Massachusetts, are among those who had pushed Mr Biden to use his executive power to wipe out borrower debts.
Wednesday’s plan falls short of the $50,000 per borrower plan that Mr Schumer and Ms Warren had asked for.
A one-time cancellation of $10,000 for each borrower earning a maximum of $125,000 will cost the federal government around$300bn, according to an estimate from the Penn Wharton budget model at the University of Pennsylvania.
Mr Biden addressed this criticism on Wednesday, saying his student forgiveness plan is the “economically responsible course”.
“I will never apologise for helping working Americans and the middle class,” he said, adding that “no high-income individual or high-income household will benefit from this action”.
Republicans and some moderate Democrats have said debt cancellation will add to inflation by giving Americans more money to spend. And others say that blanket debt forgiveness is unfair to those who have already paid off students loans.
House minority leader Kevin McCarthy, a Republican from California, quickly criticised the plan on Twitter: “Who will have to pay for Biden’s debt transfer scam? Hard-working Americans who already paid off their debts or never took on student loan debt in the first place,” he wrote.
Some Democratic lawmakers have pushed back, saying that cancelling student loans helps address economic racial disparities.
Black students are more likely to borrow federal student loans and at higher amounts than other Americans. Four years after earning bachelor’s degrees, black borrowers owe nearly $25,000 more than their white peers on average, according to a Brookings Institution study.