Three girls, two aged 14 and one 15, and two boys, 15 and 16, died in the single-vehicle accident on Tuesday night.
The Picton High School students were crammed into a Nissan ute being driven by the P-plate driver when it left the road and hit the tree near the Wollondilly Shire village of Buxton about 8pm.
The impact tore the ute apart and all five passengers died at the scene. The driver survived and was taken to Liverpool hospital with non-life threatening injuries.
He was arrested in Bargo about 2pm on Wednesday and taken into Narellan police station for questioning, police said in a statement
Commander of the Metropolitan Crash Investigation Unit, Acting Inspector Jason Hogan said the driver returned a negative breath test at the scene.
"Preliminary investigations would indicate that speed is a possible factor," he told reporters on Wednesday.
He described the scene as "extremely confronting" for the people who called triple zero, as well as first responders, some of whom lived in the community and knew the victims.
"It must be extremely traumatic for family, friends, first responders and the local community to have five young lives lost in such circumstances," he said.
Police family liaison officers were offering support to the families and the Road Trauma Support Group would also provide counselling.
Police were investigating how six people came to be travelling in the ute, which was registered as a four-seater.
"Obviously having six people in a four-seater vehicle is inherently dangerous," Mr Hogan said.
"That will be one of the lines of inquiry."
Education Department deputy secretary Murat Dizdar said the school community was "deeply impacted by this tragic news".
"It is an extremely distressing and disturbing day for the entire education family," he said.
Two separate counselling teams were at Picton High, one dedicated to staff and another to supporting the 1100 students. The victims were from years 9 and 11.
"The department will provide that support for the school community for as long as it is needed," Mr Dizdar said.
Camden police chief Superintendent Paul Fuller, who has been in the force for 38 years, described the crash site as "one of the worst accident scenes I have ever come across".
Distraught teenagers wearing school uniforms laid flowers and cards on Wednesday at the crash site.
Premier Dominic Perrottet also offered condolences, saying "Our hearts go out to them at this difficult time".
He visited teachers at Picton High School on Wednesday to lend his support to the distraught community.
Wollondilly Shire Mayor Matt Gould said the Buxton community was waking up in shock and mourning.
"The loss of so many young lives is just devastating and you can't put into words the overwhelming loss many in our community are feeling," he posted on Facebook.
"Our thoughts are with the Picton High and Buxton communities and particularly with the family and friends of those involved, as well as the emergency responders who had to deal with such a heartbreaking scene.
"There's an awful lot of people in the shire that are hurting today, so we need to be there to support and look out for each other."
Investigators are appealing for anyone with dashcam footage or information to contact them.
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