The answer that you provide will be used by the financial aid department at your school to determine the amount of aid that you are qualified for.
Financial aid eligibility is determined by the Cost of Attendance at your specific school. Cost of Attendance includes tuition, books, school fees, room and board, and other miscellaneous education-related expenses, including an allowance for transportation.
Because Cost of Attendance includes room and board and a transportation allowance, each school has a separate estimate for on-campus and off-campus residents.
Your school will base its room and board allowance on the cost of either a moderate priced dorm option, or the average cost of sharing a local (cheap) apartment or home. Students living at home with their families or parents get a credit for the cost of room and board, as well, because it is assumed that they will contribute to the family expenses.
Dorms are sometimes, but not always, more expensive than other local living arrangements. I can't speak for your particular school or community in this regard. Also remember that off-campus students receive a larger transportation allowance than on-campus students.
You should choose the option that best represents what you'll be doing for living arrangements. You'll want your Cost of Attendance estimate to mirror your circumstances as closely as possible. If you search your school's website, you may find their figures on Cost of Attendance.
Good luck - I hope that helped.