I happen to agree with every single word you said. I will emphasize, however, there are two horrible complications. They are pretty much the root of all the problems you see today.
First, borders. Israel's internationally recognized borders encompass all the West Bank and Gaza - the areas of Mandatory Palestine. Gaza and the West Bank were occupied by Egypt and Jordan militarily, but the current borders between those two territories and 1948 Israel are only ceasefire lines, not borders. Despite 19 years of there being no Jews in either territory after being ethnically cleaned by the occupying forces, both territories have literal millennia of history of Jews living in there. And Jews live there today. The Jewish state unilaterally uprooted all Jews living in the Gaza strip in 2005, which is widely regarded as a social mistake and a security mistake, and there is very little chance that this will be done again in the West Bank.
Secondly, education. The people of Gaza and the West Bank were prevented from establishing functions of state by UNRWA. In the West bank, the PA currently rules and does a decent job of providing state services - far below the standards anyone would actually want to live in, but able to be rehabilitated. In Gaza however, Hamas has been providing state services in parallel with UNRWA. However, UNRWA was largely responsible for children's education in both areas. UNRWA's curriculum teaches that Jews are to be genocided from the holy land, and that the entire areas of Mandatory Palestine are to be part of the Palestinian state. They teach that dying to kill Jews is the highest honor that one could achieve in Palestinian society. Many Westerners, and of course Israelis, have a hard time imagining a peaceful Palestinian state established when these are the values of the population. Remember, no matter what the final borders will be, they will be long and hard to defend, and we are wary of a hostile population amassed on those borders.