I don't think that's a logical conclusion, just from looking at your argument.

Universities are pretty much always basically regional-monopolies, while it's true that not every university gets the same amount of applicants, I don't think they're struggling to get students altogether? But I'm not American, so maybe it's different in the USA?

If it's not different in the US, then this kind of subsidy is much worse then the result based one, because their incentive ends at getting people into courses, not successfully finishing them. So from a profit incentive, keeping them an extra year is highly desirable