Play Tweakers

My wife and I have 4 kids. The oldest is finishing junior year and will be applying to colleges this fall. He is a great kid and a fantastic student. Currently ranked 3 in his class but thinks he can take 2 before graduation. He is maxed out on AP courses. Perfect GPA. Great test scores. Tons of volunteer hours at the animal shelter and president of an animal science club he created at his school. Key role in honor society, does the spring musical, runs track, and does marching band. All in all a great applicant.

But we fall into the weird range of being too "rich" for financial aid but too poor to pay out of pocket for an elite education. His dream school is pricey and we don't expect to receive much aid. I have been telling my wife we need to be real with him and tell him that his best options at this point are to look at our state school (he doesn't want to go there but will apply) OR schools that give merit aid to students like him. We have found some schools that will basically give him full tuition for his scores and grades. My wife thinks that is killing his dream before it even starts. She says we should let him apply everywhere and then figure it out as far as finances are concerned. My argument is we have 3 other kids after him to put through college. Figuring it out for him could mean less for them in the future.

I think we need to just lay it out. Show him what we can afford and what options he has that won't put us under. My wife thinks he worked hard and we shouldn't crush his dreams because "where there is a will there is a way" to make things work. So, what do you guys think? Am I being too harsh?

Note: He will need further education after this. He wants to either get a PhD or be a veterinarian, so either way more schooling after undergrad which is even more reason to not go all out IMO.

Edit: Important note. His dream school does NOT offer merit scholarships (or athletic scholarships). They ONLY offer need based aid and he will not qualify.