[tikhonj]

Isn't most research funded out of external industry and government grants that also pay into the university (ie grant overhead)?

Given that even most top research universities get by on a fraction of Harvard's endowment—while running largely comparable research programs—it's definitely possible to do without. Harvard obviously does strong research, but not that much stronger than the rest of the top 100 (top 200? 500?) universities. Certainly not 10–50× stronger!

My impression is that what really makes Harvard and other highly endowed universities stand out is their really aggressive financial aid. That's probably one of the things that's almost entirely funded out of the endowment as opposed to external sources or tuition and fees.