The uni I worked for eventually rolled out that policy after the initial "all freshmen live in dorms now" backlash, but it's a tiny fraction of the student population whose parents live in town. State unis are deliberately located away from the population centers, for obscure reasons involving a mistrust of European politics.
Probably because its cheaper to buy lot of land away from population centers.
The logic seemed to play out in land grant unis as well, but looking at some history articles about my alma mater, it seems more complicated than "big city bad" -- the big city was on the opposite side of the state boundary river, and on the opposite side of the Slavery issue. Instead as best I can tell, the decision was driven by local legislature party politics of the time, with accusations of voter fraud, vote buying, and bad faith negotiations.
Perhaps the reason most of the state unis I can think of are in small towns is simply that without a crossroads or river confluence driving trade, landowners in those areas were most eager to get a state institution to prop up property values?
One point of university is to make it on your own. If your daddy is rich, this is in the dorms, if not, you rent a basement room nearby and bike in.