Please tell me you're not a lawyer! This is one of the worst arguments I've ever heard.
First off, "penniless college students" are still college students. We may safely assume that they will not be permanently penniless, and may further assume that they may yet buy music when they have the cash. Secondly, even at the current moment, these "penniless college students" are paying tuition, meals, etc. They have money, in other words, they just choose not to spend it on the CDs. The diminished value is both immediate and evident.
As many people on this thread have pointed out, the argument is economic, not legal. Legally, it's theft. Period. But the economics don't work out so easily. The cost of copying has plummeted to 0, or nearly so. The cost of legal copies has remained artificially high - as the record companies settlement on claims of price fixing shows. Therefore people begin copying. As it spreads, the cost of the penalty for getting caught also lowers, as most people around you are doing the same thing, which further lowers the cost of copying, spreading it further.
I believe that we are now past the tipping point on this issue. The RIAA doesn't think so, and they're trying to raise the penalty cost through these lawsuits. They need outrageous damage awards, though, to bring the penalty cost high enough to actually get people to stop. And, frankly, the damages they're requesting are probably too outrageous for people to accept - self defeating as it were.
Drew Garrett