Let the kids go where they want regardless of where they live. Schools could recruit as much as they want or can afford. If a kid can get free tuition, go for it. I say negotiate the best deal possible, ipods, playstations, skateboards. Middle Schoolers will have more power than ever before. Agents will be hanging out at all the biggest middle schools looking for clients.
Then the schools can pick what conference or division they want to play in each season based on the money spent to compile their team.
If there are no rules they wont have to worry about anyone breaking them.