The BBC is reporting that the contract will run five years and up his wages from £2,000 to £30,000 a week. This news ends any speculation regarding the young winger's move away from Anfield.
The paper went into detail regarding a deal between the Gunners and Liverpool that would have seen Sterling move the Emirates in return for £8 million and Theo Walcott.
All the speculation is over now, and it's hard to argue that both Sterling and Liverpool benefit from the new contract.
This is a critical stage for the player. Only 18 years old, Sterling looks like one of the brightest prospects in English football. It's vital to handle him right, otherwise he would develop to his full potential.
Making the move to a bigger club too early could leave Sterling out of the team sheet on a frequent basis. Adam Johnson and Jack Rodwell failed to improve when they moved to Manchester City. It's also hard to see where he would fit in at Manchester United.
Staying at Anfield enables him to have the right situation and team around him to mature and improve into possibly a world-class winger.
While he might not have the Champions League to play in, at this stage it's more important for him to get used to playing in the Premier League.
This is just his full first season of top-flight football. European competition can come a little later.
More importantly Sterling is not going to be rushed in his development. He has been and will be a focal point of the Reds' attack.
This ensures that Rodgers will consistently select him in the team sheet, but one or two bad performances won't hurt the manager's faith in Sterling.
While the pressure to win now at Liverpool is very strong, there's also the understanding that the club is without a doubt in a rebuilding stage. Champions League football would be great, but the most important thing is that Rodgers has this squad showing signs of improvement.
The Reds may be struggling on the pitch, but they have a young core from which they will rely on in the coming years.
The likes of Jonjo Shelvey, Fabio Borini, Andre Wisdom, Samed Yesil, Suso, Sebastian Coates, Joe Allen and Martin Kelly are all in their early 20s. Now, Sterling can definitively be included in that list.
Those players are at the very least two or three years away from reaching their peak footballing years. Liverpool can grow together as a club.
Even with as much as Sterling is gaining from the new deal, Liverpool might be getting the better end of it.
Anfield has become a bit of a winger's graveyard over the last couple of years with the likes of Joe Cole, Albert Riera, Ryan Babel, Milan Jovanovic and Stewart Downing all failing to make an impact.
Sterling brings a different dimension from those who have recently preceded him. He possesses a fantastic amount of speed and enough dribbling ability to make that speed effective.
It's one thing for a player to be fast, but if he can't do anything with it, then he's just running up and down the pitch, hardly making an impact on the match.
That's often the criticism leveled against speedy wingers like Walcott and Tottenham's Aaron Lennon.
In terms of the team as a whole, money can buy a lot of things, but it can't buy chemistry and continuity.
Barcelona do have some of the best players in the world, but they're incredibly successful because of the way they are able to communicate and work together on the pitch.
That's not to say that the players at Liverpool are comparable to Barca, but Rodgers' style is similar to that of the Catalans. As the younger players feature more and more, they'll learn how to play with each other.
From a business perspective, this is a great move for Liverpool as well.
At the moment, Sterling's value is around £10-15 million. By the time he reaches the end of this five-year contract, he could be worth twice that.
Transfer fees are vital for a club like Liverpool. It can't rely on the matchday attendance of Manchester United and Arsenal and doesn't have a rich owner like Chelsea and Manchester City do.
This would depend on the fact that Sterling would leave Anfield at some point, on which it's not really fair to speculate.
Should Liverpool cross this bridge, though, it knows full well that it can do a tidy piece of business on the winger.
Supporters should expect big things of both Sterling and Liverpool in the coming years.