CPython internally uses NUL-terminated strings in addition to storing a length. This is a very early design choice, present since the very first version of Python, and still true in the latest version.
You can see that in Include/unicodeobject.h where PyASCIIObject says "wchar_t representation (null-terminated)" and PyCompactUnicodeObject says "UTF-8 representation (null-terminated)". (Recent CPython implementations select from one of 4 back-end string types, depending on the Unicode encoding needs.)
Many Python extension modules expect a NUL terminated string. It would be difficult to implement substrings as slices into a larger string and preserve the low-level C API. Not impossible, as it could be done using a copy-on-C-API-access. Or Python could require all extension writers to use a new subslice-friendly API. But that complexity is not worthwhile given the problems found from experience in other languages which implement subslice references, as Dietrich Epp described.
I see little in Kevin's answer which is applicable to this question. The decision had nothing do to with the lack of circular garbage collection before Python 2.0, nor could it. Substring slices are implemented with an acyclic data structure. 'Competently-implemented' isn't a relevant requirement as it would take a perverse sort of incompetence or malice to turn it into a cyclic data structure.
Nor would there necessarily be extra branch overhead in the deallocator. If the source string were one type and the substring slice another type, then Python's normal type dispatcher would automatically use the correct deallocator, with no additional overhead. Even if there were an extra branch, we know that branching overhead in this case is not "expensive". Python 3.3 (because of PEP 393) has those 4 back-end Unicode types, and decides what to do based on branching. String access occurs much more often than deallocation, so any dellocation overhead due to branching would be lost in the noise.
It is mostly true that in CPython "variable names are internally stored as strings". (The exception is that local variables are stored as indices into a local array.) However, these names are also interned into a global dictionary using PyUnicode_InternInPlace(). There is therefore no deallocation overhead because these strings are not deallocated, outside of cases involving dynamic dispatch using non-interned strings, like through getattr().