Meanwhile, Biff and Skippy get a taxpayer-subsidized 4 year frat party.
I think it would be completely fair to have reasonable minimum academic performance requirements. You have to have shown promise in high school and must continue to get good grades in college or university. That way Biff and Skippy likely get zero or only one year of that frat party. If they can fool around and still get good grades then maybe that's ok - they do seem to be learning.
To deal fairly with people who did not do well due to circumstances beyond their control (say a parent died the week before finals) there could be some sort of review process. There could also be some sort of probation system where people who were borderline would pay some cost to show that they were serious. Improving their grades would then remove that required payment.
People tend to not value things that they don't think costs them anything.
I would make a slightly more nuanced statement. People may value less something which is given to them as compared to something they had to earn. Individual results will likely vary significantly as to how much less. Studying hard to get good enough grades is earning the reward of free tuition.
I would consider my own personal experience here. My family did not have a lot of money, so I earned my own money to pay my way through a four year B.Sc. While I had excellent grades in high school, I received only one scholarship that amounted to the cost of a couple of text books. I graduated with an A+ average and the government (Canadian) gave me a scholarship which paid my way through graduate school. They more than got their money back in taxes I've paid over the years.
At the same time, I knew people who's parents paid their tuition for them, and who failed out after one year of frat partying. I also knew people who's parents paid their tuition and who studied hard and did well.