This is a great question and one that I'm frequently asked.  I was talking to a friend recently who's doing a masters in landscape architecture so you can imagine the size, variety and importance of the files she's working with.  Sadly, her university gives her only a tiny amount of storage space on the server - something like only 50mb.  Also, the university warns that she shouldn't use USB drives "because they are unstable and you might lose them"  What can she do?

OK, it's not launched yet but in principle this looks like could help her enormously.  This is what the site says:

Password-protected online file storage. Always available where you need it.

When you sign in to Windows Live Folders, you're in charge

For each folder you create, you choose who has access to it. Add new folders, rename them, or change who has access at any time.

Always where you need them

  • 500 MB of free online storage, available from any computer with Internet access.
  • Create personal, shared, and public folders -- you decide who has access to each folder.
  • Folders work well on any Windows or Macintosh computer with Firefox 1.5 or higher, or Internet Explorer 6.0 or higher.

How we help protect your files

  • Your personal folders are password-protected with your Windows Live ID, so only you have access.
  • When you create a shared folder, the friends you're sharing with need to sign in with their own Windows Live ID and password.
  • Just like at your online bank, all file transfers are protected using Secure Socket Layers (SSL).

Personal

  • Use personal folders to back up important files that are only for you.
  • Get to your files from any computer with Internet access by signing in with your Windows Live ID.

Shared

  • Shared folders make it easy to collaborate with coworkers or classmates.
  • You decide how much control each person has over each shared folder. Some can just read what's there: others can add and delete files.
  • Everyone who is sharing uses their own Windows Live ID.

Public

  • With public folders, anyone on the Internet can view your files, but they can't change them.
  • Want to show your public files to others? Just send them a link! Each folder and file has its own web address.

For more information take a look at http://folders.live.com/WelcomeMoreInfo.aspx