This didn't help us at all. The question here is why "similar to which" is incorrect; or rather, th

This is an unusual question.  Typically, this sort of question involves "which" versus "that" -- two relative pronouns -- or "that" versus "those" -- two demonstrative pronouns.

And therein lies your answer.  The pronoun "which" has only two uses -- to ask a question (which apple is best?) or to introduce a nonrestrictive clause. Restrictive and nonrestrictive adjective clauses are used to tell us something about the subject of the sentence -- in this case, "colonists".

Since the clause that follows which tells us nothing about the subject, but does tell us something about the sentence's object -- "schools" -- we must be looking for a demonstrative pronoun.  Demonstrative pronouns include this, that, these, and those, but not which. Since the object "schools" is plural and at a distance "in Europe", we are looking for those.

"The colonists created schools similar to those they had known in Europe."