4 Reasons Your Dependency Status Matters When It Comes to Financial Aid

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You might think that moving out of your parents’ place means you’re ready for the real world. You’re not alone.

About 40 percent of millennials believe that reaching financial milestones like paying rent is the surest sign of independence, according to a Bank of America survey.

Regardless of where you live, however, the Department of Education (DOE) might still see you as a dependent. This status matters when it comes to receiving federal aid for college.

Here’s how to determine whether you’re truly independent or dependent, plus how that could affect your path to campus.

Independent and dependent student definitions

To receive financial aid from the federal government, filling out the FAFSA annually is a must. Your ability to receive government-funded grants, loans, and work-study opportunities is partly decided by your dependency status.

If you’re a dependent student, you’ll report your family’s income on the FAFSA, as it’s assumed you’ll have help paying for college. As an independent student, you’ll report your financial information (and your spouse’s).

Because being independent might lead to greater access to federal aid, you’ll need to prove your filing status. You won’t just self-identify and move on.

Consider these factors that determine your dependency:

  • 24 or older
  • Married or have a dependent
  • A graduate or professional student
  • A veteran or a member of the armed forces
  • An orphan, a ward of the court
  • An emancipated minor or homeless

To be deemed independent, you must fit into one of those buckets. If you don’t, you’re a dependent.

4 ways your dependency affects your financial aid

The requirements of being an independent student in the eyes of the DOE are pretty close to non-negotiable. You can’t change your age, marital status, and grade level at the drop of a hat.

So although you’re not in control of your dependency status, it’s important to be aware that how you’re classified affects how much federal aid you can receive.

Here are all four ways your status affects your finances.

1. Maximum borrowing amounts

Federal loan borrowing limits are decided by your dependency status and year in school. Freshman and sophomore students who are categorized as independent, for example, can borrow $4,000 more in loans per year than their dependent peers. Upperclassmen independents can borrow $5,000 more.

Here are the maximums for federal loans:

borrowing limits for college students

Image credit: Federal Student Aid

There’s one loophole to the dependent student definition. If your parents aren’t eligible for a Direct PLUS Loan to help pay your tuition, you could receive additional Direct Unsubsidized Loan funds.

It’s also important to point out that dependency status is not as big of a deal in the world of private student loans. With that said, as an independent student, you might be hard-pressed to find a cosigner if your parents are out of the picture.

2. Eligibility for grant aid

Although your eligibility for federal aid isn’t mentioned in the DOE’s dependent student definition, there’s still a connection. After all, dependent students are assumed to have more financial support from home. With higher Expected Family Contributions (EFC) than those of independent students, they’re less likely to receive need-based aid.

Work-study programs are based, in part, on financial need. Traditionally, grants are also need based while scholarships are often awarded for merit, like high marks in the classroom.

The DOE’s four grants are all need based:

  1. Federal Pell Grant
  2. Federal Supplemental Educational Opportunity Grant (FSEOG)
  3. Teacher Education Assistance for College and Higher Education (TEACH) Grant
  4. Iraq and Afghanistan Service Grant

Unlike loans, these grants are a form of gift aid. They don’t need to be repaid.

3. Qualifying for in-state tuition

If you’re an out-of-state student, you might think it’s easier to score an in-state tuition rate as an independent. That’s not necessarily true.

As a dependent student, you’d have to prove that you and your family lived in the school’s state for as long as two years before enrolling.

As an independent, you’d have to prove you earn and spend your own money. Providing bank statements and tax returns would be a good start.

Although your dependency status can change your path toward establishing residency for in-state tuition, it’s a rocky path nonetheless.

4. Receiving a tax deduction

Like the Federal Student Aid office, another branch of the federal government might classify you as a dependent — the Internal Revenue Service (IRS).

If you remain a dependent during your student loan repayment, you — and your family — should be aware of the tax implications. The IRS allows you to deduct up to $2,500 in paid federal and private loan interest from your taxable income. To be eligible, you can’t be a dependent on someone else’s tax returns.

Your parent could claim the student loan interest deduction if they took out a loan for you. But you could only claim it if you’re an independent.

Consider your dependency status

If you’re not sure whether you’re an independent or dependent student, check out the DOE’s infographic quiz. Once you know where you stand, you’ll know how you’re affected.

Most importantly, knowing your dependency status can help you understand your maximum loan allowances as well as your access to federal grants. You might not be able to go from a dependent to an independent overnight, but at least you can plan for your reality.

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College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.

(1)All rates shown include the auto-pay discount.  The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.

(2)This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.

(3)As certified by your school and less any other financial aid you might receive. Minimum $1,000.

Information advertised valid as of 11/4/2019. Variable interest rates may increase after consummation.


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Published in Paying for College, Student Loan Repayment, Student Loans

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