""Second, while the benefits of poetry, literature, etc are not as immediately apparent as doctors and engineers, I do believe they are important in a high functioning society. The problem is, the needs of liberal arts students are so vastly different than STEMM, that it's hard to accommodate both in the same higher education system.""
Yes, absolutely. I think maybe the solution is to get the University and College division to be more absolute? It's a sticky problem.
Reloading before I sent that, I see you address it. I think maybe the solution is, as I say above, to make the divisions of Colleges within a University system be more significant. This will require significant cultural and practical changes (here's one very simple one: saying a person went to the University of State will have to be amended to the College of Whatever at the University of State), but there's no reason that a University's College of Engineering can't be an entirely different experience than being enrolled in the College of Liberal Arts. It would mean drastically cutting the course requirements for University enrollees, but that should be done anyway.
I'd hesitate to cut science-y and liberal arts-y education entirely apart (although engineering trade schools might be necessary, I'm not as familiar with the field). For financial reason the associate's degree Draug references is going to be the best choice for a lot of people, but there's much to be gained in both immediate and long-term effects from encouraging engineers to read literature and write clearly or teaching poets and lawyers to also understand basic scientific concepts. However, given that it's difficult to impart such skills even in four years of study, perhaps the most realistic approach would be to give students a foundation in these concepts (a semester or two's worth at most). Lots of schools have a Math for Liberal Arts type courses, and I think that's a good thing.