That is completely wrong.
Cropping in photoshop degrades the image because it is like the old "digital zoom" function of point & shoot cameras. Every crop you make "effectively" reduces the "megapixels" of your photograph (I know, purists, that this isn't the right terms to use but I am trying to make sense of this for Prodigy).
Basically, when you crop digitally in PS, you are "effectively" reducing your 10mp camera to a 6mp camera, or a 4mp camera or even less.
The crop factor built into the camera does not do that at all. It is 100 percent of the resolution of the sensor. All it does is (again, effectively if not actually) add focal length to your lenses. It in no way affects the image quality good or bad, unlike "digital cropping".