Decentralized lending startup Pencil Finance said Wednesday it has deployed $1 million in on-chain student loans, with funds directed to borrowers in the Philippines and Indonesia as part of a broader push to expand education financing in emerging markets. The initiative works by collecting funds from investors and placing them into structured loan tranches via smart contracts on EDU Chain, a Layer-3 blockchain built on Arbitrum Orbit for educational applications. Liquidity was initially provided by Animoca Brands, Open Campus—a DAO focused on decentralized education—and NewCampus, a business upskilling platform. The protocol handles loan disbursement and repayment on-chain, with capital split between a $750,000 senior tranche offering a fixed 15% annual yield and a $250,000 junior tranche with variable returns and first-loss risk. Once pooled, on-chain funds are distributed to education partners, who convert them into local fiat currencies. ErudiFi, a tuition financing provider with eight years of experience in the Philippines and Indonesia, receives the capital and holds it in its treasury for student loans. Pencil Finance said its protocol decentralizes capital flow, repayments, and—over time—governance, while borrower evaluation remains centralized. Lending, yield distribution, and transaction tracking are handled via smart contracts on-chain, though borrower vetting still requires due diligence by the core team. The company plans to transition governance to $PEN token holders through a DAO model. “This is uncharted territory,” Jiro Reyes, CEO of Filipino-led edutech platform Bitskwela, told Decrypt. The launch comes amid renewed interest in tokenized real-world assets, which include government bonds, credit products, and other types of asset-backed financing.  "The opportunity is considerable, to say the least." Animoca's Executive Chairman, Yat Sui, told Decrypt. "The student loan market is valued at approximately $3.3 trillion. The total value locked on-chain for all blockchains is around $115 billion." "If just 10% of the value of student loans were to be tokenized, that would roughly quadruple the current TVL of all of the world’s blockchains," Sui added. Pencil Finance positions education lending as a new vertical in that broader category, one that offers both social utility and investor yield. When students apply for loans through ErudiFi, the company pays tuition directly to schools. Students then repay ErudiFi in “manageable monthly installments" ranging from three, six, nine, and 12 months plans, helping them "balance studies with part-time work and avoid predatory loans," Pencil Finance told Decrypt.  As students make repayments, ErudiFi “returns the funds,” along with interest, through the Pencil Finance platform. These returns then generate yield for the original on-chain investors. "I grew up in a country where college tuition was highly accessible—government support meant that even students from low-income backgrounds could pursue higher education without the burden of debt," Pencil Finance co-founder Frank Li told Decrypt. "So early on, I didn’t have a strong sense of how student loans could be a barrier."  It wasn't until Li arrived in the U.S. that he says he realized how different things were. "Many talented students in the U.S. rely on loans just to finish their degrees, and some even turn down offers from their dream schools because the debt burden is too high," he said. "Now, being based in Asia, I’ve seen how different—and in many ways worse—the situation is in emerging markets." "Even capable students are locked out because they have no credit history, no collateral, and no institutional pathway," Li continued. "And when financing is available, interest rates can reach upwards of 20% APY, driven by the inability of global liquidity to flow into these markets." Degrees of debt Although loans increase short-term access to capital, policy researchers have argued that simply offering microcredit, particularly at elevated interest rates, may not be sufficient to drive meaningful economic outcomes for borrowers. Undergraduate federal student loans in the U.S., meanwhile, carry a fixed interest rate of 6.53%, according to figures from the Department of Education. In the Philippines, a government-backed loan program once offered families access to student financing at 5%, but the initiative, introduced during the pandemic, was phased out after the 2021–22 school year. Since then, students have largely relied on private lenders, microfinance firms, or informal credit providers, where annual interest rates can run from 30% to more than 100%. Microloan rates in the country, for instance, can carry effective annual interest rates exceeding 60% when issued by private lenders, according to industry data published by the Asian Development Bank. Pencil Finance said that ErudiFi typically offers interest rates starting at 1.9% per month, plus a one-time service fee of 4.5% to 10%. Even though roughly one-third of schools in its network subsidize interest payments, allowing some students to borrow at 0%, the standard monthly rate compounds to an effective annual rate of approximately 25.34%, roughly four times higher than in the U.S. While the demand for student loans in the Philippines is "consistent and growing," Bitskwela's Reyes noted that the loans will be "sourced and managed on-chain," which may impact how the product is perceived. On-chain student loans could offer a more transparent alternative, but they are entering a market where borrowing costs remain high and have become "a barrier for students," Reyes said. "Filling those gaps can easily put a product like Pencil Finance strongly on the map," he added.