You're actually on the right track:
Essentially, Illithids from the far future (see Lords of Madness) travel back in time in order to speed up their race's ascendance to ultimate power. To do so, they perturb a planet near the game-world's star system's asteroid belt, generating a periodic rain of smallish asteroids to devastate the surface- Starfall. The heroes of the world rise to help out, but ultimately are overwhelmed.
Surface civilization collapses, and most books (of all kinds) wind up getting used as fuel...those that survive the Starfall, that is. Civilizations of the Underdark fare somewhat better, but faced with raids by displaced surface dwellers, have also have their problems.
In the entire world, what scrolls and tomes remain intact are largely in the hands of the most isolated of Underdark spellcasters- everything else is scraps. There are no schools of wizardry. No mentors survived.
***
So, at the time of the PCs, most forms of writing are rare- most PCs & NPCs will be illiterate. Would-be spellcasters are essentially rebuilding the knowledge of the workings of magic from the ground up- there are still no known teachers.
I've been polling my would-be players: about a third like the sound of designing 100% of their own spells (with the possible exception of their 9 spell-levels of spells), a third would prefer the spellcraft system, and the others are noncomittal.
When I say spells received from leveling are not free, what I'm saying is that since the whole system is predicated on a combination of piecing together odd scraps of scrolls & tomes with personal research filling in the gaps, I can't see a rationale for giving the PCs a pass and merely pick out a few choice spells. While systematic, the results are neccessarily haphazard and a direct outgrowth of the campaign's background. Perhaps despite all his research, Willie Wizard just can't fill in the missing pieces of the Magic Missile spell he's been kicking around for years. OTOH, perhaps he figures out a spell from the Spell Compendium or the Book of All Spells that he proves to be quite adept at wielding... Or perhaps next level he'll have that flash of insight that unlocks that spell for him.
He'll get 2 spells, all right...they just may not be the 2 he wanted most.
Part of my rationale for doing this is my players themselves.
I know that despite all of the campaign background reasons that would logically constrain & alter PC spell choices, the players who most often play spellcasters would choose the same spells they always do (and you know which ones those would be) unless there was a mechanical reason why they couldn't. NPCs built to fit the campaign would perforce be at a disadvantage.
Thus, I have to minimize the number of PHB spells they can simply choose "off the rack."
Doing so at every step of the way will force them to have spell lists that actually reflect the level of magic in the game world, learn to use different spells, and possibly even force them to share the knowledge they gain (most players in this group hoard their spells- few allow spell transcriptions of any kind for any reason).
