These are the main issues why simply upping an across-the-board, need-based grant program is the way to go.
If the goal is to lower college costs to students while providing quality education with minimal economic dislocation, I think you're right that increasing grants across the board is the way to go.
But, if Cuomo's goal is to be able to say he provided free tuition for the lowest possible pricetag (longterm consequences be damned, because they'll be felt after the next election cycle), then increasing grants probably isn't the way to go. It seems that the math they're working with is that the cost of the program = existing public seats x cost of tuition. In the short run maybe that even works, but of course in the long run it won't as pressure to increase seats mounts.
The alternative seems to me to be for the SUNY and CUNY systems to absorb a bunch of private schools. I believe this happened on a fairly large scale in Canada during the 20th century. Having "SUNY Paul Smiths" seems like a fine enough solution to me. The biggest barrier seems to me to be that Boards often take as part of their charge that the institutional mission be fulfilled only within the boundaries of maintaining independence, often at the eventual expense of the larger teaching and research missions. There are of course other issues: the state might not want to be saddled with deferred maintenance costs and/or relatively inefficient business models that will be hard to change; there may be influential admin who want to maintain their autonomy, or fear the loss of their jobs outright; tenured faculty could also be let go under such exigent circumstances. While there are clearly lots of powerful forces working against mergers, I think they are a reasonable solution for much of what ails us.