It think that gets a lot of it. If everyone has loan money, universities get less out of competing for students than students get out of competing for spots at universities. So the universities stop competing (financially) for students (that's a euphemism for charging the maximum).

To me it makes sense to limit the support that students see to competitive grants that only cover most of the cost of tuition (like 75 or 80 percent). Then universities have some reason to keep tuition lower (students will be somewhat price sensitive), students have motivation to examine whether they should go to school. There's probably some fairness issues to address with that, I guess the competitive aspect of the grants could be the size of the grant, with every student having some access.

edited in the (financially) in the first paragraph.