It's been my experience in college that most teachers just let the bottom quartile of the class fail (and likely switch into another major).
But in reality, even that doesn't matter. In the best universities, your worst students will be better than the average students at the second-rate institutions. If the teacher is simply giving the class to the top 75 percentile, the class will be even better still at the top uni.
How can somebody raise from the bottom 20% if they get subpar education?
Second, there can be individual mobility. A poor performing student with otherwise potential to improve might receive help to overcome whatever is bringing them down, and get them to thrive again. Even in that case, it would help them to be in a smaller class, as it's much easier to identify who among the low performers who want to be helped, and those lost causes who are a drag for everyone else.
Where this matters is in something like a lab or music practicum where the communication between instructor and students is the class. But I can tell you from experience that the variance among different years of students in a single university is large enough to disprove your uncle's point. I had one class that could have been confused for graduate students. Yet another might as well been sent by the Trump administration with the goal of destroying the institution of ear training.
You don't need to know everyone's level, just a rough idea about what the worst student of the class might need.
The first exam that students in test-prep schools take is before classes start, usually a mock university test that can be used precisely to assess your current level and to gather information about the class overall.
You don't need to know who are the worst performers. But if you know that your class of 250 has an uneven distribution of aptitude, you'd try to break the class apart.
I've taught some college classes and guest lectured in many others. The bottom 10% is trivial to identify in a matter of minutes.
You don’t need to know which specific 50 students are in the bottom two deciles, just that they exist and that your policy is to teach to what you’ve estimated is the 3rd decile and above.
You will find out who they are in the exams, but you know they exist in next year’s class even before that class is admitted to the uni.
He used to say two things: that he has estimated to have taught at least 100 thousand people in his life (seems just crazy boasting, but feasible when you are working in 5-8 different schools per semester and each class has 100-250 people) and that a teacher is always teaching for the worst student in the class, and that the only reason that top universities are better is because of their selection process.
Forget class material, forget infrastructure and fancy facilities. What makes the best universities is the fact that the top students are there.
If you can not (dramatically) change your students and make them smarter, you can make your classes smaller and segment by performance. This at least stops your top 20 percentile from being dragged down by your bottom 20.