Debt Consolidation for Veterans: Your Options in 2024

Struggling to get out of debt is a big task, whether you’re a military veteran or not. But unlike some civilians, there’s a high chance that military service members have had to deal with unavoidable factors such as several relocations to areas you’re unfamiliar with and unemployment among a partner or spouse during active duty.

These factors and others can cause money issues and make you more vulnerable to falling into debt or resorting to things like payday loans. In fact, a study of veterans’ finances found that military veterans are more likely than other consumers to report difficulties managing their credit.

Given that there are 16.5 million U.S. veterans, representing 6.4% of the U.S. population, this is a huge red flag. But that doesn’t mean you'll never figure out how to pay off debt. Tools and strategies such as debt consolidation can be a good option to consider depending on your situation.

How debt consolidation for veterans is different

Debt consolidation, also sometimes referred to as consolidating credit card debt, is a method used to simplify paying back debt owed to creditors, ideally at a lower interest rate, so you don’t have to pay back quite as much.

The main strategy behind this method is combining your loans into one new loan, taking out a loan amount that can cover your total existing debt, and leaving you with just one loan to repay and manage.

There’s a lot of crossover between debt consolidation options for veterans and others, but as a veteran of the armed forces, you have special access to programs, terms, and organizations that could further aid in the process of helping you pay down your debt.

The key is understanding your options — what you can benefit from now versus what you may have been able to benefit from when you were active duty military.

For example, while active duty service members benefit from the SCRA (Servicemembers Civil Relief Act) and the Military Lending Act with certain protections against interest rates during their term of duty, those acts don’t extend the same protections when you become a veteran.

This example isn’t meant to further frustrate you but rather to illustrate that things can change over time when you transition to post-duty life, so it’s important to understand what’s available to you.

Government debt consolidation options for veterans

1. VA cash-out refinance loan

A VA cash-out refinance loan replaces your current home loan with a new one. This loan can be used for primary residences, and you don’t need a current VA home loan to qualify.

VA loans are specialized home loans primarily available to veterans and current service members. While they’re backed by the Department of Veterans Affairs, these loans are provided by private lenders, such as banks and mortgage companies. The VA guarantees a portion of the loan, which enables the lender to provide you with more favorable terms that you might not have otherwise received.

A cash-out refinance loan is a loan that allows you to cash out some of the equity you’ve accumulated in your home. You borrow more than you owe on the mortgage and keep the difference in cash. Let’s say you have a home that’s worth $250,000, and you owe $175,000. You want to consolidate $20,000 in debt.

You could take out a new, cash-out refinance mortgage for about $195,000. Your lender would pay off the $175,000 you owe and give you $20,000 after closing.

With VA cash-out refinance loans, you may be able to cash out all the equity you have in your home. There’s typically no down payment if you stay below the Fannie Mae/Freddie Mac conforming loan limits.

Note that these loans are different than streamline refinance loans, also known as Interest rate reduction loans (IRRRLs). IRRRLs could help you obtain a lower interest rate by refinancing an existing VA loan.

2. Military Debt Consolidation Loans (MDCL)

If you have a VA mortgage, you may be eligible for the Military Debt Consolidation Loan program (MDCL). This loan is essentially a home equity loan specifically meant for veterans.

A home equity loan is a second loan on your house. So unlike a cash-out refinance, where you have an entirely new home loan, you have a second loan for some or even all of the equity in your home.

Let’s say you have a home that’s worth $250,000, and you owe $175,000. You want to consolidate $20,000 in high-interest debt. You could take out an MDCL for $20,000, which you would receive as a lump sum. You would still owe $175,000 to your original lender, and now you have another loan for $20,000.

The downside to this type of loan is that if you run into financial difficulty, it’s secured by your home. Because it's secured debt, if you stop paying, your home could eventually go into foreclosure.

You will need to pay closing costs on this type of loan.

3. Debt consolidation loans with specialized terms

If you’re not a homeowner or prefer not to borrow against the equity built up in your home, you still have specialized financial assistance options available for debt relief and credit counseling.

Partnering with an agency such as VA Financial could help you receive up to $40,000 to repay unsecured debt often at a lower interest rate. Active and retired service members are eligible to apply, along with military family members.

Other agencies that offer consolidation to all consumers sometimes have special discounts or waivers for members of the military. Consolidated Credit, for example, waives all program setup fees for veterans and their families.

Keep in mind that these loans aren’t regulated or overseen by the VA the way VA-backed loans are. Be sure to review the repayment terms of these loans carefully. A debt consolidation loan should ideally have the same or a lower interest rate than your current debt.

Pay attention to how long your loan will last and the amount you’ll pay over time. In general, a loan with a shorter term will have a lower interest rate, while a longer-term loan will have a higher interest rate.

4. Leave No Veteran Behind (LNVB)

This national 501(c)3 non-profit organization provides educational employment services to veterans facing economic hardship. One arm of LNVB is providing retroactive scholarships that pay off the student loans of veterans who have completed some form of higher education but weren’t fully covered by veteran educational programs such as the GI Bill.

To qualify for the retroactive scholarship:

• You must have completed some form of higher education
• You must be experiencing economic hardship
• You must commit to 100-400 hours of community service

The organization also provides support in helping veterans find employment opportunities and form leadership skills.

Non-government options for debt consolidation

While the government is able to provide some financial protections for military personnel, that doesn't mean that a federally backed program will always be the best financial option for you.

The smartest way to consolidate debt depends on your unique financial situation. It could include using a personal loan or a balance transfer card. Both strategies are similar and involve using a credit product to consolidate the money you owe into one new debt to help make it easier for you to pay off. But you have to weigh the pros and cons of each.

Personal loans

A personal loan is an unsecured loan. This means the interest rates are likely higher than you would see for a home equity loan.

A personal loan might make sense for paying off large amounts of debt over a long period. You also need to make sure that the interest rate you’re getting on the new debt consolidation loan is lower than the interest you were paying before, or else the switch likely wouldn’t be worth it.

Make sure you also keep an eye out for things like origination fees and prepayment penalties on a personal loan.

Check out our list of the best personal loans.

Balance transfer credit cards

Balance transfer credit cards are cards that offer a 0% intro APR for a period — typically 12 months or more. A balance transfer could make sense if you’re confident that you can pay off most or all of the debt before the end of the balance transfer period.

You also need to qualify for a balance transfer card, many of which require good-to-excellent credit.

Check out our recommendations for the best balance transfer credit cards.

Nonprofit credit counseling

Don't overlook the services that may be available to you from a nonprofit credit counseling agency. Credit counseling companies offer a wide range of services and are experienced in helping people through the most difficult of financial situations.

The services of nonprofit organizations credit counseling companies are typically low cost or free. Counselors can help you develop a budget, get copies of your credit reports and scores, and develop a debt management plan.

A debt management plan involves your counselor working with your creditors to lower the interest rates on your debt. You make a single payment to your counseling agency, and they pay your creditors. There is typically a low set-up and monthly fee.

Check out our list of the best credit counseling companies.

Debt settlement services

Depending on how much of a struggle you're experiencing, you may want to investigate a debt management program or debt settlement service. You may also want to look into using the services of one of the best credit repair companies.

It's likely that if you've had financial trouble, your credit report has taken some hits. A credit repair company might be able to help you raise your credit score and also learn how to better manage your money.

Credit repair and debt settlement companies typically negotiate with your creditors on your behalf for a lump sum settlement. While the company is negotiating, you pay a monthly payment to the debt settlement company. As funds accumulate and creditors agree to settle, the lump sum payments are made to your creditors.

You can also negotiate with creditors on your own. If that process sounds too daunting, however, a reputable credit repair company could help.

Check out our list of the best credit repair companies.

Tips for consolidating debt for veterans

Dealing with debt can feel overwhelming. Here are a few tips to help you decide on the right way to consolidate your debt.

• Determine your priorities: What do you want to accomplish by consolidating your debt? Lowering your monthly payments? A lower interest rate? Both?
• Create a budget: Look at your current spending patterns and income. How much are you paying on your debt currently? Are there any places you could lower spending?
• Get multiple quotes: Whether you go with a home equity loan, a personal loan, or something else, get multiple quotes so you can compare your options.

FAQs

Bottom line: how to leave debt behind for good

The bottom line is that regaining control of your personal finances and becoming debt-free is possible. It’s good to keep in mind that debt consolidation is just one strategy among a handful of others for overcoming financial difficulties for military members.

With the help of specialized debt relief programs for veterans, you can pay off your loans, rebuild your credit (and perhaps get one of the best credit cards for the military), and leave debt behind for good.

Understanding and weighing your options before making a choice can help improve your chances of financial success in the future and set you up on a good foundation going forward.