You can see how family dysfunction involves the whole family.
One thing I read that was interesting is that pwBPD have co-dependent traits as well- something they share with their partners. So while your wife may have also been enabled, she may also tend towards enabling others.
It has to feel terrible to see a parent- or any family member, in your FIL's situation- even though this isn't an isolated incident but a pattern for him. I agree with your position- to not continue to enable the FIL, and that your own expenses- student loans are a priority.
Yet, FIL managed to push your wife's emotional buttons and she must have felt badly- and also may have felt obligated to help him. FOG may be a pattern in her FOO too. So - not being able to handle her own feelings or able to say no to him led to that conversation.
There really isn't a way to reason with feelings. I don't know what kind of money arrangement you have in your marriage. One suggestion I have read is that each person have some money to do what they want with. This depends on the budget of course but if household expenses are met and there is some left- then each person can have a coffee or clothing budget for their personal expenses. Include your student loans in the household expenses- they are necessary for you to have the kind of employment you need.
Then, if she chooses to give her money to her father- whatever that may be- $10, or $50 or whatever she has- then that is her decision. You keep your boundary on what is needed for expenses- and your own share of the spending money if there is extra. This may not go well, but it may be one way to deal with this.
your comment about my FIL putting my wife through the FOG is spot on, and from learning about her family history, I suspect my FIL was responsible for a lot of her issues. he himself was from a rough family, and abandoned by his father at some point.
I am not opposed to helping out people who need it, and we've helped him out before, both by sending him cash, clothes, and other things he needed. In one case he told my wife he was starving and destitute so we sent him $200 (he lives in a foreign country) and lo and behold next time my wife talked to him, he had bought himself a new tablet and got wireless service so he could play video poker.
I expect at some point when his health fails we'll have to take care of him, but he's still not retirement age, basically refuses to work, and is openly dishonest about his situation as I described above (using our money to buy a tablet is just one example). My wife seems to understand this on one hand, but on the other gets angry with me for not showing enough sympathy for her feelings or being willing to "help." it's like she deals with her embarassment over her parents by trying to make me responsible for the situation (ie her feelings) in some way.
the bottom line is, we've sent him money before; he wasn't honest about his situation then , and he's not being honest now.
he's been sitting around doing nothing for several years now. it's not just a stroke of bad luck... .I would have sympathy for that.