Judging by history, this would be seen as a license to artificially inflate costs, such that the university system would become a machine for extracting money from the public treasury and placing it into private hands.
You must have some feedback control, wherein the amount of public funding is dependent upon some objective criterion that measures the extent to which the public college provides a useful service to the public.
For instance, give the college a percentage (that decays exponentially) of the income taxes collected from their alumni. Schools that focus on teaching the knowledge and skills that actually make students employable would then be able to more freely provide tuition discounts to students, expecting that the recurring revenue stream after graduation would make up for the lesser amount collected up front.
They all hound their alumni for money all the time, anyway.
There were fewer students, fewer colleges, and lower enrollment rates. A big reason why college costs have risen is due to the artificial demand created by subsidized loans.
Just as a gas will expand to fill its containing vessel, costs tend to grow to meet the available budget.
If 100% of the university operating budget for student instruction is guaranteed by the state, you might be surprised at how often the seats in the lecture halls need to be replaced. Rather than being reupholstered after 10 and 15 years, and replaced after 20, they are replaced every 5 years. The profitable business moves from instruction to instruction support services.
Maybe the dean is part owner of a company that specializes in lecture hall seat installation, or in a landscaping company so large it can only handle entire zoos, universities, and corporate office parks.
Money without a vigilant guardian eventually gets taken. This is why pouring more stupid government money into anything should be done with extreme caution, because it often invites corruption, in order to get a space at the trough.
College costs have risen because they could rise. The subsidized loans don't empower the students; they just enrich those with the power to capture the subsidy. The money would have been far better spent on building out new universities, or increasing the student instruction capacity of existing universities. That would have driven down student costs--rather than ensuring that any rising costs could always be paid by debt--and the stupid government money would have been flowing to those younger academics who are now perpetually wandering in tenureless adjunctland.
