Student loans represent the second-largest category of household debt in America at over $1.7 trillion, sitting right behind mortgages and ahead of auto loans and credit cards. The federal government owns most of it directly after taking over the market in 2010, and here’s what’s wild about that: there’s essentially zero liquidity in the entire market.

You can trade mortgage-backed securities in massive volume with tight spreads and transparent pricing. Corporate bonds trade electronically with same-day settlement. Even auto loan ABS has an active secondary market. But student loans? They just sit on balance sheets generating whatever yield the original terms specified, with no real mechanism for lenders to exit positions or for new capital to enter except through origination. This creates massive economic inefficiency that gets passed directly to borrowers through higher rates and limited access to capital.

The history explains why this market is so broken. Student lending started with the Federal Family Education Loan program in 1965, where private banks originated loans with government guarantees and interest rate caps set by Congress. This created some liquidity because banks could sell the guaranteed loans or package them into securities, but the price controls meant there was no real risk-based pricing and no way to differentiate between a computer science major at MIT and someone pursuing an unmarketable degree at a for-profit school with terrible outcomes.

The system limped along for decades with increasing dysfunction as loan volumes grew. Banks participated because the government guarantee eliminated credit risk, but the rigid interest rate structure meant they couldn’t price for actual default risk or administrative costs. By the 1990s and 2000s, various crises emerged where servicers failed, default rates spiked, and the government ended up bailing out the system repeatedly. The whole structure depended on continuous government intervention rather than market mechanisms.

In 2010, Congress eliminated FFEL entirely and moved to 100% federal direct lending through the Department of Education. The government now originates all federal student loans directly, holds them on its balance sheet, and services them through contracted servicers. This removed any remaining market function from student lending, turning it into pure government administration. No private capital, no price discovery, no liquidity, no competition. Just a $1.7 trillion portfolio sitting on the federal balance sheet with repayment rates that have collapsed to under 50% in recent years.

The private student loan market still exists but represents a small fraction of total volume and charges interest rates north of 15% in many cases. Part of that is credit risk, but a huge component is the illiquidity premium. Private lenders can’t easily sell these loans, can’t package them into tradeable securities without enormous costs and complexity, and can’t adjust pricing dynamically based on changing conditions. So they charge massive spreads to compensate for being stuck with the loans until maturity or default.

The mortgage market solved liquidity through securitization, where you bundle thousands of loans into pools, tranche them by risk, get credit ratings, and sell them as mortgage-backed securities. This works beautifully for mortgages because you have standardized collateral (houses with verifiable values), consistent underwriting standards, deep historical data on default patterns, and regulatory frameworks that support secondary market trading. Securitization turns illiquid loans into liquid securities that trade actively with transparent pricing.

Student loans have none of those advantages. There’s no collateral beyond the borrower’s future earnings, which are impossible to value or verify. Underwriting standards are all over the place, ranging from no credit checks at all for federal loans to stringent requirements for private loans. Default patterns vary wildly based on school, degree, completion status, and labor market conditions. The regulatory framework is unclear and constantly changing as politicians debate forgiveness programs and borrower protections.

Even when you overcome those challenges and structure a student loan ABS, you end up with an expensive, slow, inflexible product that only sophisticated institutional investors can access. The structuring costs are enormous, the legal complexity is brutal, and the resulting securities trade infrequently in opaque markets. By the time you package loans into a security, get ratings, create offering documents, and sell through broker-dealers, you’ve added so much friction and cost that most lenders find it more economical to just hold the loans and eat the illiquidity.

The bundling process also destroys information and optionality. When you package 10,000 loans into an ABS, buyers can only invest in the pool, not individual loans. You can’t select loans based on specific characteristics you like or avoid risks you don’t want. You’re stuck with whatever the pool contains, weighted however the structurer decided, with no ability to adjust as conditions change. This makes pricing harder, limits who can participate, and reduces overall capital efficiency in the market.

Think about what would have to exist for student lending to function as a real market. You’d need transparent pricing based on actual risk characteristics rather than political mandates or arbitrary spreads. You’d need liquidity so lenders can exit positions and new capital can enter based on market conditions. You’d need fractional ownership so investors can build diversified portfolios instead of taking concentrated risks. You’d need instant settlement so capital can move efficiently without multi-day delays and counterparty risk.

You’d also need to preserve the beneficial aspects of loan participation frameworks, which are well-established legal structures that let multiple parties share in a loan’s cash flows without the complexity of securitization. In traditional loan participations, a lead lender originates the loan, maintains the servicing relationship, and sells participation interests to other lenders who receive their pro-rata share of payments. This works well for commercial lending and has clear legal precedent, but the mechanics are clunky with paperwork-heavy transfers and limited liquidity.

The servicing coordination matters more in student lending than other asset classes because you need ongoing management of borrower relationships, payment processing, default resolution, and regulatory compliance. You can’t just buy a position in student loans and ignore the operational requirements. Someone has to handle the actual interactions with borrowers, process their payments, manage forbearance or deferment requests, and pursue collections if necessary. Traditional securitization often severs the servicing relationship from ownership, which creates principal-agent problems where servicers’ incentives don’t align with investors’ interests.

What you really need is infrastructure that combines the legal clarity of loan participations with the liquidity and efficiency of modern financial technology. A system where loans can be fractionalized and traded with stock-like ease while preserving proper servicing relationships and regulatory compliance. Technology that enables instant settlement and transparent pricing without requiring complex legal restructuring. A marketplace where individuals and institutions can participate based on their risk preferences and values instead of being limited to whatever bundled products intermediaries decide to create.

This is where blockchain technology could actually solve real problems instead of being a solution looking for a problem. The core features of public blockchains are exactly what student lending needs: transparent record-keeping, instant settlement, fractional ownership, and standardized interfaces. If you tokenize student loans on chain, you create digital representations that can be traded, fractionalized, and settled just like any other digital asset, but backed by real loan cash flows in the traditional financial system.

Think about what becomes possible with tokenized loan participations. Lenders originate loans using their normal processes and underwriting standards, then tokenize participation interests that can be sold in any fraction down to individual borrower level. Buyers can build custom portfolios based on school quality, degree type, borrower characteristics, or whatever criteria matter to them. Settlement happens instantly on-chain instead of requiring wire transfers and multi-day clearing. Servicing stays with the original lender who maintains the borrower relationship, while participation interests trade freely in secondary markets.

The fractionalization enables better risk management because investors can diversify across many individual loans instead of taking concentrated bets on large pools. If you’re worried about default risk from a particular school or degree program, you can avoid those loans specifically. If you want exposure to STEM degrees from highly ranked universities, you can build that portfolio exactly. This precision wasn’t possible with traditional securitization, which forced you to take whatever the pool contained.

The market is massive at $1.7 trillion federal plus whatever private lending volume exists, which provides more than enough scale to support liquid trading. The cash flows are predictable even if default rates are higher than anyone wants, which means you can price the risk if you have transparent data. The regulatory framework is in flux, which creates opportunity for new models to establish themselves before rigid rules lock in. And the technology finally exists to build what the market actually needs instead of trying to force student loans into structures designed for other asset classes.

Someone is going to figure out how to create liquidity in student lending. The question is whether it happens through thoughtful infrastructure development that preserves the beneficial aspects of loan participations while adding modern efficiency, or through some ham-fisted political solution that just creates different problems. The policy debates will continue, but the market opportunity exists for anyone who can actually build the infrastructure instead of just talking about it.

Similar to last week’s edition of the Saliba Signal, I’m going to write about a company that is actually building this infrastructure. A company with real marketplace mechanics, servicer integrations, and a legal framework that works within established loan participation structures. The part that surprised me is it’s not who you’d expect.

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