1. Anything that's free but is limited gets abused. You need look no further than the NHS in the UK were most GPs are employees of the NHS. Office hours of 9-4 (ie no incentive to provide a better service) are typical, the system clogged up with people who either don't need to see a doctor or, in the case with many old age pensioners, they simply go to the doctor for someone to talk to.
2. I would love to see some study in this but it is my belief that reducing the cost of higher education increases the earning potential of college graduates. When I went to university (in Australia) it certainly seemed to be the case that the earning potential difference between graduates and non-graduates wasn't anywhere as near as the difference in the US;
3. Free systems create extra demand from people who don't really want to be there and are simply going for the lifestyle, which may in turn keep others who really want to go out;
4. Governments may pay per college student but those funds aren't distributed equally. When I went almost nothing was spent on first-year students. Most of that money was diverted to research activities, which brings into question the quality of education the government was paying for;
5. If you accept the premise that paid college leads to higher earning potential, countries that have free higher education will lose people to those countries where you pay as the labour mobility is high and only getting higher. I believe this at least in part explains the brain drain from Eastern Europe to the US in the 90s; and
6. Demand will be increased by other countries. In Germany, for example, you have a lot of Brazilians who go there for free university, typically going there for 6-12 months prior to learn German.
One of the reasons that college costs so much is probably the same reason health care (in the US) costs so much: it's a protected market of sorts. In the US, IP laws mean drugs in Canada and elsewhere cost a fraction of what they do in the US (and most of the cost basis for drugs in the US goes on marketing not research).
If you want to be a doctor (of cours) you need to go to college. But what about a computer programmer? Many of the best companies will require a college degree. A computer science education is obviously useful but not a prerequisite to learning to program. Most programmers I know learnt to program before or outside college.
So what you have a captive market.
It would be reasonable to assume that competition between colleges would sort this out but that doesn't seem to be the case. Sure there is competition for students and teaching/research talent but that's not the same thing. For example, a friend of mine believes (rightly or wrongly) she'll probably never get a great teaching job because her PhD (in history) isn't from a top school like Harvard or Princeton (IIRC).
So you can choose to make a purely economic decision and go to a cheaper school but the cheaper and more expensive schools aren't necessarily equivalent, either in fact or in perception (which can be far more important).
I suspect this won't change until something disrupts the higher education system itself.