I've definitely heard of that, and I don't think it's a terrible idea. I didn't finish college, but looking back I do wish that I had lived on campus for my first year. It always felt like I didn't get the "true" college life experience not living on campus.
As for the requirement piece, it definitely sucks if it's not an expense you can take on without debt and there's no other options in the area. If there are other options, though, then people who can't or won't pay that can just go somewhere else. School's have worse requirements (BYU comes to mind) that people can opt out of by choosing to go somewhere else.
