It used to be that only "second-tier elite" athletes were matched with host families. A friend of mine ran it a couple of years ago and he didn't get any travel or hotel expenses but they did comp his entry and set him up with a host family (he has a sub-2:23 PR). I'm not sure what the policy is now but at that time the race coordinated host families only for invited athletes.
Also, I agree completely that it is one of the better races out there. Good course, great organization, great atmosphere. However, it's also true that the Duluth-area hotels take advantage of the weekend and the price-gouging is terrible. Last year I had planned to run it and reserved a king suite room at the Super 8 in Cloquet (about 30 miles west) at a rate of $185/night with a minimum two night stay (I ended getting injured and had to cancel). Anyone who has stayed at a Super 8 knows that $185 is about $130 overpriced.
Also, about the dorms - from what I've heard, they can be very noisy. I've had friends who had no problem and others who got no sleep for two nights because of late arrivals, parties in neighboring rooms, people constantly going to/from the restrooms, etc. So if you are someone who needs a good night sleep and doesn't handle noisy or busy environments well, the dorms are probably not a good choice.