Extracellular RNAs participate in intercellular communication, and are being studied as promising minimally invasive diagnostic markers. Several studies in recent years showed that tRNA halves and distinct Y RNA fragments are abundant in the extracellular space, including in biofluids. While their regulatory and diagnostic potential has gained a substantial amount of attention, the biogenesis of these extracellular RNA fragments remains largely unexplored. Here, we demonstrate that these fragments are produced by RNase 1, a highly active secreted nuclease. We use RNA sequencing to investigate the effect of a null mutation of RNase 1 on the levels of tRNA halves and Y RNA fragments in the extracellular environment of cultured human cells. We complement and extend our RNA sequencing results with northern blots, showing that tRNAs and Y RNAs in the non-vesicular extracellular compartment are released from cells as full-length precursors and are subsequently cleaved to distinct fragments. In support of these results, formation of tRNA halves is recapitulated by recombinant human RNase 1 in our in vitro assay. These findings assign a novel function for RNase 1, and position it as a strong candidate for generation of tRNA halves and Y RNA fragments in biofluids.