The entrance to JPMorgan Chase's international headquarters on Park Avenue is seen in New York October 2, 2012. REUTERS/Shannon Stapleton

By David Henry

NEW YORK (Reuters) - JPMorgan Chase & Co (JPM) has decided to get out of the student loan business, after the biggest U.S. bank concluded that competition from federal government programs and increased scrutiny from regulators had limited its ability to expand the business.

JPMorgan, which already restricted student loans to existing Chase bank customers, will stop accepting applications for private student loans on October 12, at the end of the peak borrowing season for this school year, according to a memo from the company to colleges that was reviewed by Reuters on Thursday. Final loan disbursements are expected before March 15, 2014.

"We just don't see this as a market that we can significantly grow," said Thasunda Duckett, chief executive for auto and student loans at Chase, in an interview.

Not making more loans "puts us in a position to redeploy those resources, as well as focus on our No. 1 priority, which is getting the regulatory control environment strengthened," Duckett said.

JPMorgan's decision comes after Congress acted in mid-2010 to bypass the banks and have the government lend directly to students. The federal government now issues 93 percent of student loans. Banks and other private lenders have also come under pressure from regulators and politicians to offer more flexible repayment terms on student loans.

JPMorgan's portfolio has been shrinking by roughly $1 billion to $2 billion a year since then, and is a small fraction of its assets. The company's student loan portfolio at the end of June held $11 billion - less than 0.5 percent - of its $2.44 trillion of assets. Last year, Chase made education loans to 12,500 people for a total of about $200 million.

Hundreds of thousands of students, however, still look to private lenders when they have exhausted their federal borrowing limit. Richard Hunt, president of the Consumer Bankers Association, said decisions like JPMorgan's show that the government's direct lending policies are leading to "less competition in the marketplace."

He said the government programs encourage students to take on more debt than they can afford because the loans, unlike those made by banks, do not require assessments of the ability to repay.

But many experts have said that the primary problem with student lending lies in how much college costs and in the sheer size of the debt taken on, not in who makes the loans and how they are structured and how much they cost in interest.

Moreover, others may fill in the gap. Other major lenders that remain in the business include SLM Corp (SLM.O), known as Sallie Mae; Wells Fargo & Co (WFC); and Discover Financial Services (DFS). Both Wells and Discover said on Thursday that they would continue to make student loans.

Danny Ray, president of Discover Student Loans, said although competition from the government has taken business from lending for graduate studies, his bank found more demand from undergraduate students who have already reached their government borrowing limits and are still short of the money they need.

Credit unions could also use exits by banks such as JPMorgan as an opportunity to do more business. Many entered the market in 2010 and have made about $2 billion of student loans since then, according to Paul Gentile, executive vice president of the Credit Union National Association.

JPMorgan's decision follows a broader, ongoing review of businesses amid new regulations, heightened scrutiny and capital requirements.

In July, the bank said it would exit physical commodities trading, as Wall Street's role in the trading of raw materials comes under political and regulatory pressure.

In June, the bank said its private equity unit, One Equity Partners, would become independent, as it increased its focus on client businesses. At the time, a source said the move was also driven by the bank's decision to simplify its operating structure.

(Reporting by David Henry in New York. Additional reporting by Elvina Nawaguna in Washington.; Editing by Gerald E. McCormick, Gunna Dickson, Douglas Royalty, Andrew Hay)