Q. They can both claim education credits on their taxes if they are no longer dependents. Correct?
A. No.
There's a new urban myth among college students that says they can get a $1000 from the government just for filing a tax form. For most of them, they simply aren't eligible. A full time unmarried student, under age 24, even if you don't qualify as a dependent, is only eligible for the refundable portion of the American Opportunity Credit if he supports himself by working. You cannot be supporting yourself on parental support, 529 plans or student loans & grants. It is usually best if the parent claims that credit.
Reference: Line 7 instructions for form 8863.
https://www.irs.gov/instructions/i8863#en_US_2024_publink53002gd0e674
Q. If they do, will this affect anything else that I may not be thinking of?
A. If you can claim them as dependents, you can claim the education credit, on your tax return, even though you did not actually pay any tuition or other expenses. For two students, that's a minimum of $2000 for you and possibly as much as $5000.
If you co-signed the loans, the loans count as support from you and not the student supporting herself. Students away at college are considered as only being temporarily absent and as still living with you.
The support value of the home, provided by the parent, is the fair market rental value of the home plus utilities & other expenses divided by the number of occupants.
The IRS has a worksheet that can be used to help with the support calculation. See: http://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf
