Conceivably, a system of tests or certifications could be used as a reliable signal of competence. Just make a candidate go through a battery of exams. The issue is that firms most likely wouldn't have any interest in doing this and any independent organization doing this would be tempted to change into the business of selling certificates, which would make the certificates themselves worthless.

Which isn't to say that the issue is unsolvable. But it still needs solving. I don't think anyone has paid much attention to it.

It hasn't been proven that employers put so much value on a degree. Certainly a lot of people think that employers think that, but I've yet to see a real life hiring manager come out and say "I don't care how much experience you have, without a degree I won't consider you."

In B2B deals, government contracts and the like, sometimes companies like to brag about how many PhDs and Masters they employ.

If you are selling a product to a government or a big enterprise, it helps to have a lot of people with impressive credentials in your staff.

A bachelor's degree of any type demonstrates ("signals" in economic terms): communication skills, ability to follow instructions, sufficient persistence to finish a long-term project. Some colleges are way overpriced, but in general I doubt you're going to find a cheap way for prospective employees with no real work experience to demonstrate those qualities.

I think the issue is exactly that - the colleges are low efficiency, either overpriced or not a good match for the position you go to work as.

As a hypothetical, let's say that most jobs require a degree. Let's say that you use 50% of the stuff in your English Major throughout most of your career; you've eaten a 50% inefficiency on your college investment(essentially doubling the "price/skills" of your degree), you've lost time that you could have invested in obtaining those skills. Further, you are pressured into demanding a higher salary because of your college investment, which isn't matched by the skills you've received; so either your employer carries the burden of your inefficient education, or you do.

This is usually decided by the power dynamic between the two, and if you're a broke college student desperate for a job, you don't have much bargaining power, so you're shouldering all the burden. The worst part is, there's no way for you to fix this - there's no 2-year program that is 100% aimed towards your career goal, and there's no entry-level job for you to start at 0%(you're probably already starting at the entry-level even with your 50% degree). So you're stuck making this investment whether you want to or not.

One way to look at university is insurance - you're learning all these extra things as an insurance that you'll have a baseline of skills if you change your career. The issue is, not everyone can afford such an expensive insurance, but most people are forced to take it under our hypothetical.

Because doing so would signal non conformity.

Bryan Caplan has a book coming out soon on the signalling model of education here's notes from a course he teaches http://econfaculty.gmu.edu/bcaplan/e496.html

I think in part, it's because "they" have a degree. There can be quite a bit of condescension from people who have degrees towards those who don't.. "I got a degree to get this job, you should have one too".