I work at a major public university. There are two points missing (I think) so far. These don’t go so much towards the question of “Why have time limits at all?” but rather “Why are universities always trying to decrease the time to graduation?” There are two, related, answers:
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“Average time to graduation” is becoming a common metric for comparing universities. We want students to graduate as quickly as possible (4 years or less) in order to keep that number as low as possible.
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Universities have a finite number of students they can admit, and service, each year. Every student who stays for an extra year at the university is, in some sense, one less student that can be admitted that year. Education abroad and other off campus programs are popular for this reason as well. They allow the university to admit more students, while keeping the total number of students using campus resources at any one point more or less constant.
Again, I recognize that the above two points don’t necessarily apply to completing a single degree, say 180 credits, stretched out over 10 years, but rather why universities discourage “permanent students”.