Let's step back for a second and realize there's nothing magical about college. We can make the same arguments about the validity of a high school education. In fact, I can take your argument and say that providing everyone a high school education lowers every high school graduate's wages. We can then apply the same argument to middle school or any even providing any education at all. If we teach everyone to read and write, under your model, it devalues reading and writing. Because fundamentally, your model is one where there is a fixed pool of demand for educated people and beyond that any additional education add little additional value. And that is a completely wrong assumption.

The reason why education works is that it makes all parts of society function better. Having an educated population produces a higher functioning society. That's a society that, more often than not, is able to produce more wealth faster. In fact, it's in the enlightened self interest of society to have a broadly educated population. Basic research winds up driving GDP growth as science goes from the lab to products. Having more engineers and scientists is important, but so is having musicians, writers, nurses, and so on. All these types of education are important in a modern society. What's going on in the United States is that we are slowly short changing ourselves by making it harder and harder for people to get that additional education.

But in the process we're also creating a more stratified society. A lot of social mobility comes from the "first generation to go to college." By making college education less affordable, we keep people in the lower and lower middle classes that could have a transition up the income ladder from lower skilled, lower paying jobs to white collar professions. That's just one way we're becoming a society with little social mobility. American has moved away from the meritocratic American ideal. Now, even if you're an idiot, if you start out rich you'll probably stay rich. If you're poor, even if you're smart and capable, you'll probably stay poor.