The way Ruby works is a combination of pass by value and pass by reference. In fact, Ruby uses pass by value with references.
You can read more in the following threads:
Some notable quotes:
Absolutely right: Ruby uses pass by value - with references.
irb(main):004:0> def foo(x) x = 10 end
=> nil
irb(main):005:0> def bar; x = 20; foo(x); x end
=> nil
irb(main):006:0> bar
=> 20
irb(main):007:0>
There is no standard way (i.e. other than involving eval and 
  metaprogramming magic) to make a variable in a calling scope point to 
  another object.  And, btw, this is independent of the object that the 
  variable refers to.  Immediate objects in Ruby seamlessly integrate with 
  the rest (different like POD's in Java for example) and from a Ruby 
  language perspective you don't see any difference (other than 
  performance maybe).  This is one of the reasons why Ruby is so elegant.
and 
When you pass an argument into a method, you are passing a
  variable that points to a reference. In a way, it's a combination of
  pass by value and pass by reference. What I mean is, you pass the
  value of the variable in to the method, however the value of the
  variable is always a reference to an object.
The difference between:
def my_method( a )
  a.gsub!( /foo/, 'ruby' )
end
str = 'foo is awesome'
my_method( str )            #=> 'ruby is awesome'
str                                    #=> 'ruby is awesome'
and:
def your_method( a )
  a = a.gsub( /foo/, 'ruby' )
end
str = 'foo is awesome'
my_method( str )            #=> 'ruby is awesome'
str                                    #=> 'foo is awesome'
is that in #my_method, you are calling #gsub! which changes the object
  (a) in place. Since the 'str' variable (outside the method scope) and
  the 'a' variable (inside the method scope) both have a "value" that is
  a reference to the same object, the change to that object is reflected
  in the 'str' variable after the method is called. In #your_method, you
  call #gsub which does not modify the original object. Instead it
  creates a new instance of String that contains the modifications. When
  you assign that object to the 'a' variable, you are changing the value
  of 'a' to be a reference to that new String instance. However, the
  value of 'str' still contains a reference to the original (unmodified)
  string object.
Whether a method changes the reference or the referenced object depends on the class type and method implementation.
string = "hello"
def changer(str)
  str = "hi"
end
changer(string)
puts string
# => "hello"
string is not changed because the assignment on strings replaces the reference, not the referenced value.
I you want to modify the string in place, you need to use String#replace.
string = "hello"
def changer(str)
  str.replace "hi"
end
changer(string)
puts string
# => "hi"
String is a common case where the most part of operations works on clones, not on the self instance.
For this reason, several methods have a bang version that executes the same operation in place.
str1 = "hello"
str2 = "hello"
str1.gsub("h", "H")
str2.gsub!("h", "H")
puts str1
# => "hello"
puts str2
# => "Hello"
Finally, to answer your original question, you cannot change a String. You can only assign a new value to it or wrap the string into a different mutable object and replace the internal reference.
$wrapper = Struct.new(:string).new
$wrapper.string = "String"
def changer(w)
  w.string = 1
end
changer($wrapper)
puts $wrapper.string
# => 1