Public Schools vs. Private Schools?

There's some interesting discussion about college funding going on over at Mother Jones.

A few days ago, Kevin Drum proposed that the government should only fund public schools, including in distributing financial aide. (Which is to say, students who go to private schools wouldn't be eligible for federally-backed loans.) Private schools would have to provide more financial aid or lower costs, and public state schools would get a bigger chunk of government money (and probably a hell of a lot more students.)

I was skeptical of this because I know that in Virginia, I just don't know if our state schools can maintain their quality (and they're pretty good, from what I hear) while accepting all of the middle-class students who would no longer be able to go to small liberal arts schools. Seriously, William and Mary (our publicly-funded, exclusive liberal arts school) couldn't absorb all of the straight-A, hyper-ambitious students Virginia produces, and the pressure to accept more students is already a burden on the rest of the smaller schools in the state like mine.

A professor from University of California also saw a problem with Drum's solution, but for a different reason: state schools kind of suck. (Not mine, of course.) Her argument is that state schools, especially the ones that accept thousands and thousands of students, just don't have the resources to provide the intensive teaching that small private schools can provide. There's also wide disparity between states in what kind of state-funded schools are available, so if you want to study something in particular and your state university system isn't good at teaching it, you're kind of out of luck.

This mostly led to a huge debate in the comments about whether or not specific programs at specific state schools have good teaching or not, which was a bit of a bummer because it didn't deal with the more interesting question of so what do you do? I have some ideas, but I'm not sure any of them address the issue of disparity between public and private schools and what kind of funding students should have access to; for that I really have no idea.