The issue is that it flies in the face of everything the NCAA and schools claim to be about, which is supporting student-athletes. In the situation you cite, it effectively lets an Indiana operate with a scholarship limit of 15 rather than 13. By being able to show the door to the bottom of the roster who have done nothing wrong except not being as good as other players Indiana has recruited, it makes a mockery of the scholarship limit and to what the schools at least pretend to be about (having kids get degrees).
The reason why it's not just fair to the kid to "move on" is that the kid (or their family) is now on the hook paying for the rest of their college education. I'm sure during the recruiting process that the coach was extremely upfront with the kid, stating that they would evaluate his situation each year. More likely the coach told the kid and his family that the coach's top priority was the long-term well-being of the kid, and they would provide every support system to make sure they got their degree. Except, of course, when we have the opportunity to get a better player down the road.