Agreed. Everyone is advocating for option #1 because it doesn't tell anyone that they shouldn't go to college. Option #2 is what we need but it's basically impossible to do directly.

The middle ground is the federal government starts admitting that it is footing the bill for higher education (it already is paying via loans). If the government's only option for recouping the money is via future tax revenue than there should be pressure to keep the cost per student low and expected future earnings high. Hopefully this would result in colleges offering cheap online classes, credit via exams, etc.