Injecting a dose of reality here: “American society” most definitely bows down to the Ivy Leagues, as do academics around the world. And for good reason: the Ivy League schools possess the greatest concentration of the best minds in the country. There is no use denying that truth and only in our participation-trophy-loving society would people keep insisting that Harvard or Yale or Princeton or Stanford (yes, Ivy League West) are no different than your local wonderful public university or your local wonderful private university. The Ivy League schools are quite different in so many ways. It is perfectly rational for the OP and members of his community to aspire, on behalf of their kids, for the Ivy League. Those schools still represent the best and, despite some deviations from time to time (usually in the form of moronic public servants who graduated from the Ivy League and have no common sense, inflicting their idiocy on the rest of us), world-changing things come out of those universities. Who would not want the best of the best?
And the condescension towards him and his community for feeling this way is quite astounding. I have many Indian friends from the time I lived in the Silicon Valley, and have Indian friends here in Florida, and all I know is that their desire to provide for a great education for their kids, and their willingness to make a lot of sacrifices in order to accomplish this, is to be admired, and more American parents could learn from their examples. The children I know, with whom my kids are friends, are delightful, well-adjusted, involved in the community, friendly, hard-working, and I could go on but I won’t. If that is what one gets from encouraging excellence in one’s children, what’s the problem?
There is a difference between encouraging excellence in one’s children and living vicariously through them, forcing one’s own aspirations on them. I know plenty of American parents who are the worst when it comes to this vicarious living.
Sure, are there plenty of Americans who understand that one does not have to go to an Ivy League in order to have a happy life? Well, of course, particularly since the great majority of Americans have never attended an Ivy League, and a significant majority of those Americans would never have received offers to attend the Ivy League. Yes, there are plenty of opportunities for people who attend non-Ivy-League schools. And there are plenty of students, who, while as brilliant as any Ivy League student, did not pursue an Ivy League education for many reasons.
To the OP, I think it is great that you are listening to your son and you are working to understand where he is coming from and it sounds like you are willing to come to a point where you would support your son’s decisions, as you should. It is his life afterall. Your son is very blessed. Just keep listening to him. Your name indicates that you live in San Jose, as in the San Jose smack dab in Silicon Valley, I presume. Well, having lived there myself for over a decade, I know what kind of atmosphere exists. Silicon Valley is exciting, but a very unusual place compared to other parts of the country. Talk about a concentration of some of the smartest, most energetic, most entrepreneurial, not to mention the richest people in the country. There are just some built-in conformist assumptions held by many that certain schools, certain extracurriculars, certain professions are the “best.” The more exclusive a part of the Silicon Valley one lives in, the more pressure to hold on to that conformist thinking. At the same time, there are so many rule-breakers and out of the box thinkers. These two ways of thinking butt up against each other all the time.
Sounds like you have helped your son lay a solid foundation for his life. He has loving parents who listen to him and respect him. He has excelled with his education. He is an independent thinker (major kudos to you for encouraging that.) He is going to do just fine wherever he goes. Just keep listening to him. Maybe he just loves the Bay Area. I don’t blame him, and there are plenty of great schools there (and, no, Stanford is not the only good choice! though I admit it’s gorgeous - save it for grad school.) Help him express his fears, if he has them, about the level of competition, or perhaps he fears disappointing you. He’s not the first kid to fear carrying the burden of his parents’ hopes and dreams on his shoulders.
I can’t speak for the heaven-like qualities of Cambridge, but I am plenty familiar with Palo Alto, and I am so thankful that Palo Alto is not heaven on earth. I have found plenty of heavens on earth since leaving my home state, and they all came free of the burdensome taxes, the absurd housing prices, and the life-sucking traffic 
Best of luck to you, your family, and, most especially, your son.