4 Reasons the ‘Dependent Student’ Definition Affects Your Student Loans

 May 16, 2020
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Some would say that moving out of your parents’ place means you’re ready to enter the real world. But regardless of where you live, the Department of Education might still see you as a dependent — meaning you would finance your education with dependent student loans.

Let’s look at how to determine whether you’re a dependent or independent student, and how it could affect the way you receive federal aid for college. Specifically, we’ll cover:

Independent and dependent student definitions
4 ways your dependency affects your financial aid
Special circumstances
Consider your student dependency status

Independent and dependent student definitions

You can’t consider yourself an independent student simply because your parents don’t claim you on their tax return, or if they say they won’t help you pay for school. Consider these factors to determine if you are a dependent or independent student.

To be deemed an independent student, you must fit into one of these buckets. If you answer no to all of these, then you’re a dependent student.

  • Are you 24 or older?
  • Are you married? (You count as being married if you are separated.)
  • Do you have, or will you soon have, children who receive more than half of their support from you during the financial award year?
  • Do you have dependents, other than your kids or spouse, who live with you and receive more than half of their support from you?
  • Are you a graduate or professional student?
  • Are you a veteran or a current member of the armed forces?
  • Are you an orphan, or a ward of the court, at any time since turning age 13?
  • Are you an emancipated minor or considered homeless, or were you self-supporting and at risk of being homeless, within the past year?

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 only your financial information (and your spouse’s, if you’re married).

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

4 ways your dependency affects your financial aid

The requirements of being an independent student in the eyes of the government are pretty close to non-negotiable. 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
2. Eligibility for grant aid
3. Qualifying for in-state tuition
4. Receiving a tax deduction

1. Maximum borrowing amounts

Federal student loan borrowing limits are decided by your dependency status and year in school. Freshmen 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.

If you are a dependent student, your parents may be able to take out a Parent PLUS Loan to help you pay for college. If you are a graduate student, meaning you are also an independent student, you may be eligible to take out a Grad PLUS Loan. If you’re a dependent student whose parents are ineligible to receive a Direct PLUS loan, you may be eligible for additional Direct Unsubsidized Loans.

Here are the maximums for federal loans:

Year Dependent students (except students whose parents are unable to obtain PLUS loans) Independent students (and dependent undergraduate students whose parents are unable to obtain PLUS loans)
First-year undergraduate annual loan limit $5,500 — no more than $3,500 of this amount may be in subsidized loans $9,500 — no more than $3,500 of this amount may be in subsidized loans
Second-year undergraduate annual loan limit $6,500 — no more than $4,500 of this amount may be in subsidized loans $10,500 — no more than $4,500 of this amount may be in subsidized loans
Third-year and beyond undergraduate annual loan limit $7,500 — no more than $5,500 of this amount may be in subsidized loans $12,500 — no more than $5,500 of this amount may be in subsidized loans
Graduate or professional student annual loan limit Not Applicable (all graduate and professional students are considered independent) $20,500 (unsubsidized only)
Subsidized and Unsubsidized Aggregate Loan Limit $31,000 — No more than $23,000 of this amount may be in subsidized loans. $57,500 for undergraduates — No more than $23,000 of this amount may be in subsidized loans.
$138,500 for graduate or professional students — No more than $65,500 of this amount may be in subsidized loans. The graduate aggregate limit includes all federal loans received for undergraduate study.

Credit: Federal Student Aid

It’s also important to point out that dependency status is not as much of a factor when it comes to 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 grant aid isn’t mentioned in the Department of Education’s dependent student definition, there’s still a connection. After all, dependent students are often (although not always) assumed to have more financial support from home. With generally higher Expected Family Contributions (EFC) than those of independent students, they may be less likely to receive need-based aid.

Unlike loans, these grants are a form of gift aid, so they don’t need to be repaid. Work-study programs are based, in part, on financial need. Traditionally, grants are also need-based while scholarships are more often awarded for merit, such as high grades.

The federal government’s four key grants are all need-based:

  • Federal Pell Grant: This grant is awarded to undergraduate students with exceptional financial need. Award amounts change annually. For the 2021-21 award year, the maximum amount is $6,345.
  • Federal Supplemental Educational Opportunity Grant (FSEOG): You can receive between $100 and $4,000 annually, depending on your financial need, when you apply, the amount of other aid you get and the funds availability at your school.
  • Teacher Education Assistance for College and Higher Education (TEACH) Grant: This grant program provides up to $4,000 per year for students planning to go into the teaching profession. Unlike the other grants, this one also has academic requirements, which generally mean scoring above the 75th percentile on one or more sections of a college admissions test or maintaining a GPA of at least 3.25.
  • Iraq and Afghanistan Service Grant: The maximum amount for the 2021-21 award is $6,345, equal to that of a Pell Grant. You may be eligible if your parent or guardian was a member of the U.S. armed forces and died as a result of military service performed in Iraq or Afghanistan after 9/11, if you were under 24 and enrolled in college at the time of that person’s death. Notably, another eligibility requirement states that you could receive this grant if you are ineligible for a Pell Grant by virtue of your Expected Family Contribution, but otherwise meet all other requirements.

3. Qualifying for in-state tuition

As a dependent student, you’d generally have to prove that at least one of your parents had lived in the state where your college is located before enrolling.

As an independent student, you’d have to prove your own residency, or your spouse’s, for at least a year (some states require two years) and also that you are actually an independent student (using the criteria noted above).

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 student, or claimed as a dependent on someone else’s tax returns. You and your spouse, if you are married, should also file jointly.

Your parents may claim the student loan interest deduction if they took out a loan for you. But you can claim it yourself only if you’re not a dependent on anyone else’s form. Keep in mind, however, that this pertains to the IRS’ definition of dependency, and not the definition of a dependent or independent student.

Special circumstances

As we all know, family situations can be complicated. You may be technically considered a dependent student, but have parents who cannot or will not contribute to your education. Perhaps you don’t have a relationship with your parents, or you may have come from an abusive home situation. Maybe your parents are even incarcerated.

If you are experiencing special circumstances such as these, you can indicate them when you are filling out the FAFSA. In this case, your FAFSA would then not be fully processed, and you would not get an Expected Family Contribution amount. You will also have to immediately contact the financial aid office at the school you plan to attend.

It is possible, in this case, that you may be able to be considered an independent student, and have the Expected Family Contribution calculated without including your parents’ information.

Consider your student dependency status

If you’re not sure whether you’re an independent or dependent student, check out the Department of Education’s requirements. Once you know where you stand, you’ll know how you’re affected.

Most important, knowing your dependency status can help you understand your maximum loan allowances, as well as your access to federal grants and tax deductions.

Keep in mind that, if you need more help paying for college after applying for federal loans and grants, you might consider private student loans.

Rebecca Stropoli contributed to this report

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1 Important Disclosures for College Ave.

CollegeAve Disclosures

College Ave Student Loans products are made available through Firstrust Bank, member FDIC, First Citizens Community 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. As certified by your school and less any other financial aid you might receive. Minimum $1,000.
     
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  3. 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.

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Interest Rate Disclosure: Actual rate and available repayment terms will vary based on your income. Fixed rates range from 4.24% APR to 13.03% APR (excludes 0.25% Auto Pay discount). Variable rates range from 3.83% APR to 12.53% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. Although the rate will vary after you are approved, it will never exceed 36% (the maximum allowable for this loan). Please note, Earnest Private Student Loans are not available in Nevada. Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account. It is important to note that the 0.25% Auto Pay discount is not available while loan payments are deferred.

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Loan Cost Examples: Earnest’s Loan Cost Examples: These examples provide estimates based on principal and Interest payments beginning immediately upon loan disbursement. Variable APR: A $10,000 loan with a 15-year term (180 monthly payments of $118.28) and a 11.69% APR would result in a total estimated payment amount of $21,290.40. For a variable loan, after your starting rate is set, your rate will then vary with the market. Fixed APR: A $10,000 loan with a 15-year term (180 monthly payments of $126.82) and a 13.03% APR would result in a total estimated payment amount of $22,827.79.

These examples provide estimates based on interest only payments while in school. Variable APR: A $10,000 loan with a 15-year term (180 monthly payments of $145.41) and a 11.69% APR would result in a total estimated payment amount of $26,173.03. For a variable loan, after your starting rate is set, your rate will then vary with the market. Fixed APR: A $10,000 loan with a 15-year term (180 monthly payments of $156.59) and a 13.03% APR would result in a total estimated payment amount of $28,186.67. Your actual repayment terms may vary. Other repayment options are available.

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Loan Eligibility criteria: Eligible students must: 1) For college Freshmen, Sophomores and Juniors, attend, or be enrolled to attend, a Title IV school full-time. For college Seniors and Graduate students, attend, or be enrolled to attend, a Title IV school at least half-time; and 2) be pursuing a Bachelor’s or Graduate degree. Earnest private student loans are subject to credit qualification, completion of a loan application, verification of application information, self-certification of loan amount, and school certification.

Before applying for private student loans, it’s best to maximize your other sources of financial aid first. It’s recommended to use a 3-step approach to assembling the funds you need: 1) Look for funds you don’t have to pay back, like scholarships, grant and work-study opportunities. 2) Next, fill out a FAFSA® form to apply for federal student loans. Federal student loans do not require a credit check or cosigner, and offer various protections if you’re struggling with payments. 3) Finally, consider a private student loan to cover any difference between your total cost of attendance and the amount not covered in steps 1 and 2. For more information, visit the Department of Education website at https://studentaid.ed.gov.

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1. Loan Example:

  • Loans from $5,000 – $20,000
  • Example: $10,000 IBR Loan with a 7% gross income payment percentage for a Senior student making $65,000 annually throughout the life of the loan.
    • Payments deferred for the first 12 months during final year of education.
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2. Edly Student IBR Loans are unsecured personal student loans issued by FinWise Bank, a Utah chartered commercial bank, member FDIC. All loans are subject to eligibility criteria and review of creditworthiness and history. Terms and conditions apply.


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Funding U Disclosures

Offered terms are subject to change. Loans are made by Funding University which is a for-profit enterprise. Funding University is not affiliated with the school you are attending or any other learning institution. None of the information contained in Funding University’s website constitutes a recommendation, solicitation or offer by Funding University or its affiliates to buy or sell any securities or other financial instruments or other assets or provide any investment advice or service.