Bone morphogenetic protein (BMP) retrograde signaling is crucial for neuronal development and synaptic plasticity. However, how the BMP effector phospho-Mother against decapentaplegic (pMad) is processed following receptor activation remains poorly understood. Here we show that Drosophila Epsin1/Liquid facets (Lqf) positively regulates synaptic growth through post-endocytotic processing of pMad signaling complex. Lqf and the BMP receptor Wishful thinking (Wit) interact genetically and biochemically. lqf loss of function (LOF) reduces bouton number whereas overexpression of lqf stimulates bouton growth. Lqf-stimulated synaptic overgrowth is suppressed by genetic reduction of wit. Further, synaptic pMad fails to accumulate inside the motoneuron nuclei in lqf mutants and lqf suppresses synaptic overgrowth in spinster (spin) mutants with enhanced BMP signaling by reducing accumulation of nuclear pMad. Interestingly, lqf mutations reduce nuclear pMad levels without causing an apparent blockage of axonal transport itself. Finally, overexpression of Lqf significantly increases the number of multivesicular bodies (MVBs) in the synapse whereas lqf LOF reduces MVB formation, indicating that Lqf may function in signaling endosome recycling or maturation. Based on these observations, we propose that Lqf plays a novel endosomal role to ensure efficient retrograde transport of BMP signaling endosomes into motoneuron nuclei.