From the people I know that studied at places like Harvard and Yale (which since I'm Canadian isn't a huge sample size), I've been told that there are essentially two different streams of undergrads there - those on legacy admissions and those who qualified otherwise (either via brains, affirmative action, or other means). I was left with the impression that the legacy admissions are mostly people who've coasted through life. The rest are a full spectrum of people.

Most of Harvard's endowment is via alumni, so it doesn't surprise me in the least they continue with it.