I don’t support the dream act, because it does a lot more than I would do. But I’m talking about a state deciding what to do with their own citizen’s tax dollars and their own colleges and universities, not a federal amnesty program.
There is a question of equal protection that goes beyond Texas, which is why this is being challenged in the courts. To grant illegal immigrants in-state tuition rates directly discriminates against non-resident U.S. citizens from surrounding states. That is a direct violation of the equal protection clause.
Here is the court case in Texas that challenges in-state tuition for illegal aliens: Immigration Reform Coalition of Texas v. State of Texas (University of Houston)