This scenario is specifically addressed by the Application and Verification Guide. The Application and Verification Guide is part of the Federal Student Aid Handbook, a source of subregulatory guidance provided to college financial aid administrators by the US Department of Education. College financial aid administrators must generally comply with the guidance published by the US Department of Education unless there is a special circumstance not addressed by the guidance. The following is an excerpt from page AVG-25 of the 2011-12 Application and Verification Guide. Similar guidance has been published for over a decade.
Other sources of support for children and other household members If the student is receiving support to raise her child, is the child still considered a legal dependent? If one or both of the student’s parents are directly or indirectly providing more than 50% support in cash or other assistance to the child, then the student would answer "No" to the FAFSA question about legal dependents. "Indirect support" to the child includes support that a parent gives to the student on behalf of the child. If the student is living with a parent who is paying for most of the household expenses, the parent would usually be considered the primary source of support to the child, and the student would answer "No" to the question about legal dependents. However, there may be some cases where the student can demonstrate that she provides more than half of her child’s support even while living at home, in which case she would answer "Yes" to the question about legal dependents. When the student receives money for the child from any source other than her parents, she may count it as part of her support to the child. Sources include child support and government programs, such as TANF and the Supplemental Nutrition Assistance Program (SNAP, formerly the federal Food Stamp Program), that provide benefits for dependent children. So a student may be considered independent when the benefit she receives is the primary support for her child. For example, if a student who lives alone with her child receives cash from her boyfriend that amounts to more than 50% support for her child, then she would be able to count the child as a dependent and in her household size, and she would be independent. If the boyfriend is the father of the child and a student himself, then he would also be able to count the child as a dependent and in his household size, and he would be independent too.Page AVG-14 of the Application and Verification Guide addresses situations in which the applicant reports no income on her FAFSA. An applicant who reports zero income is likely to be selected for verification. The college financial aid administrator may ask the applicant for information about how she supported herself even if her FAFSA wasn't selected for verification. The financial aid administrator may use professional judgment to adjust the income data elements on the FAFSA to "reflect income the family receives that doesn’t appear on the tax return." The Application and Verification Guide also states that "Any cash support for the student, other than support from a parent for a dependent student, counts as untaxed income and must be reported." While in-kind help is not considered to be untaxed income, the financial aid administrator may use professional judgment to make adjustments corresponding to the value of the in-kind help. These adjustments may include modifying data elements on the FAFSA and/or changing the cost of attendance, as appropriate.