hoosiermama12 - congrats on your son's acceptance at UMich, which I think is a huge accomplishment and recognition of his talent.
That said, I wholeheartedly recommend to let him attend the school of his choice. Ultimately it is really all about where you feel you fit in, and will thrive as a person, as this will help you to do well and succeed in life. As many have said before, to succeed in musical theatre you really don't need to attend a "big name school", even though as some say it is easy to get hung up on a brand name.
Also, as I believe Dr. John pointed out on a different thread, it is possible that George Pinney simply overlooked his talent this time, and that your son could try out again for MT at IU next year.
The fact that he has been accepted with a big scholarship at his dream school should be reason for a a happy time. Tell him to no longer feel crushed, but that there obviously was a different plan for him right now. May be sort of an ultimate test as to how much he really wanted to attend IU. Again, things usually happen for a reason, and as time goes by, the pieces of the puzzle fall into place.
In closing, I simply find the fact that, in spite of all his BFA acceptances, your son sees himself at IU, very telling, and for me there truly lays the answer to solving your dilemma.
Sending you congrats and hugs from California
!