First, many schools don't want to get any bigger, they want to become more illustrious. They want to move up the famous U.S. News and World Report college rankings. Almost all of the college rankings judge schools by the amount of resources they spend per student. What incentive does this give universities that want to improve their standing? Get and spend more money, and maintain your student body size.
To help students afford college, the government subsidizes attendance in many ways. From grants, to subsidized students loans, to simple budget increases for universities. This increases demand. If the supply of student slots does not increase, the price to attend will rise until the subsidy has been completely negated for those at the margin. When the government spends more, a restricted supply will push prices upwards. It becomes a vicious circle of higher prices and increased subsidies.
The other justification for these kinds of subsidies are that they help the economy and increase incomes throughout the entire community. Steven Malanga writes today at RealClearMarkets in response to the lack of skepticism of this paradigm by the press:
A few researchers, however, have asked these questions, and the answers aren’t always pretty, nor are they part of the conventional wisdom. One of the skeptics is Richard Vedder, distinguished professor of economics at Ohio State University and head of the Center for College Affordability and Productivity. He’s spent years observing the upward spiral of tuition at American colleges and universities and the increase in government’s subsidies for higher education. His research suggests we are already over investing in our public universities.
For one thing, Vedder has found little evidence that government spending on higher education stimulates an economy. He has run hundreds of regression analyses trying to understand the relationship between subsidies for public universities and local economic growth, and what he’s found is that at best the spending produces no gains, while at worse, “the more states spend on higher education, the lower the growth” over time.
On the question of whether state spending actually lowers tuition and costs for students, he goes on.
...state universities devote a small proportion of incremental public financing to keeping tuition low. In one study, the Center for College Affordability determined that on average public universities use only 30 percent of public funding increases to hold down tuition costs. Instead, public universities have been pouring more money into intercollegiate athletics and student services, raising salaries rapidly and increasing hiring of non-instruction personnel. In 1975, for instance, the ratio of non-instructional staff to instructors at America’s colleges and universities was about 4.5-to-10. Today, it’s about 8-to-10.He also makes some good points that not every student is capable of performing well in college, if you want to read the rest.