Debt Consolidation for Veterans: 9 Options To Consider

Falling into a cycle of debt is tough, and military service members may be at greater risk due to unavoidable factors like relocations and a partner's unemployment during active duty. In fact, the 2024 Financial Literacy and Preparedness Survey from the National Foundation for Credit Counseling found that military households are more likely than civilians to struggle with credit card spending, missed payments, and other financial difficulties.

Veteran debt consolidation can be a good tool for getting out of debt, and options for this look different from options for non-veterans. Learn how it works and what choices you have.

What is debt consolidation?

Debt consolidation is a method to simplify paying back debt owed to creditors, ideally at a lower interest rate, to decrease the overall amount you repay.

One of the most common strategies for consolidating debt is taking out a new loan and using that to pay off your existing debt. This way, you have just one monthly payment and interest rate to manage, ideally at a lower interest rate than your original debt.

How debt consolidation differs for veterans

The concept of debt consolidation works largely the same for veterans as it does for other consumers. However, as a veteran of the armed forces, you have special access to programs, terms, and organizations that could help you pay off your debt.

It's important to note that debt consolidation programs for veterans differ slightly from those available to those in active duty military. For example, while active duty service members benefit from the Servicemembers Civil Relief Act (SCRA) and Military Lending Act with certain protections against interest rates during duty, those protections don't extend to veterans.

How to know if debt consolidation is right for you

Generally speaking, we'd recommend debt consolidation for anyone with significant debt and can lower their short- and long-term costs by consolidating it. Many debt consolidation loans have lower interest rates than credit cards, meaning you can lower your monthly payments and your total interest costs while also paying off your debt more quickly.

While borrowers with lower credit scores can consolidate their debt, it tends to be easier to do when you have good credit. This opens up more loan options and helps you qualify for lower interest rates, which is why you might consolidate debt in the first place.

Finally, debt consolidation might be a good option for you if you qualify for one of the programs that can make it more affordable.

Government debt consolidation options

1. VA cash-out refinance loans

Loan amounts: Up to $766,550 in most areas; $1,149,825 in high-cost areas

Who it's right for: Eligible military veterans who want to refinance from a non-VA loan to a VA-backed loan.

How to find one: Shop around with private lenders or contact your VA regional loan center.

Important considerations: A cash-out refinance requires changing the terms of your entire mortgage. If you currently have a low interest rate on your home loan, a cash-out refinance may not be right for you.

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 available to veterans and current service members. They're backed by the Department of Veterans Affairs but provided by private lenders.

A cash-out refinance loan lets you cash out some of the equity you have in your home. You borrow more than you owe on the mortgage and keep the difference in cash. Let's say you have a house 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.

2. Military Debt Consolidation Loans (MDCLs)

Loan amounts: Depends on your home equity

Who it's right for: Veterans who have significant equity in their home and want to use it to consolidate debt but don't want to refinance their entire mortgage.

How to find one: Like VA loans, MDCLs are issued by private lenders

Important considerations: Just like a cash-out refinance, an MDCL is secured by your home. If you can't repay your debt, your home could eventually foreclose.

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

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

3. Debt consolidation loans with specialized terms

Loan amounts: Varies by lender

Who it's right for: Veterans who aren't homeowners but want military-specific perks.

How to find one: Shop with lenders that specifically advertise special perks for veterans

Important considerations: Lenders for these loans aren't affiliated with the VA. They may be no better than any other personal loan for debt consolidation and may even be targets for scammers.

If you're not a homeowner or prefer not to tap into the equity in your home, you have options for specialized debt consolidation loans. For instance, getting a loan through VA Financial could let you borrow up to $40,000 to repay unsecured debt, often at a lower interest rate. Active and retired service members, along with military family members, are eligible to apply.

Other lenders that offer consolidation loans can have discounts or waivers for military members. Consolidated Credit, for example, waives all program setup fees for veterans and their families. A debt consolidation loan should ideally have the same or a lower interest rate than your current debt.

4. Leave No Veteran Behind (LNVB) scholarships

Loan amounts: Not disclosed

Who it's right for: Veterans with student loans due to educational costs not covered by the GI bill who face economic hardship.

How to find one: Offered by the nonprofit organization Leave No Veteran Behind

Important considerations: This isn't a form of debt consolidation but rather debt relief. However, it's only available to veterans who meet very specific eligibility requirements.

This national 501(c)(3) non-profit organization provides educational employment services to veterans facing economic hardship. One arm of LNVB provides 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 to 400 hours of community service.

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

Other options for debt consolidation

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

Personal loans

A personal loan is an unsecured loan that can be used for nearly any purpose, including debt consolidation. Because it's unsecured, the interest rates are likely higher than you would see for a secured loan such as a home equity loan. Personal loans are particularly good for consolidating credit card debt since they have lower interest rates than credit cards and allow you to switch from a variable rate with compounding interest to a fixed rate and monthly payment. I recommend a personal loan to pay off large amounts of debt over a long period.

Balance transfer credit cards

Balance transfer credit cards offer a 0% intro APR for a set period — often 12 months or more — after you open an account. A balance transfer could make sense if you're confident you can pay off most or all of the debt before the end of the introductory period.

You need to qualify for a balance transfer card, and many require good-to-excellent credit. You'll also likely have to pay a balance transfer fee of 3% or 5% of your transfer amount. If you can't pay off the entire balance by the end of the 0% intro APR period, you'll start accruing interest again. Consider setting up a payment plan to pay off the debt on time.

Learn about the best credit cards for military.

Home equity loan or HELOC

A home equity loan or home equity line of credit (HELOC) is a way to borrow against your home equity to pay off debt, even if you don't have a VA loan. A home equity loan is an installment loan, meaning you receive a lump sum and pay it back in fixed monthly payments at a fixed rate. A HELOC, on the other hand, works more like a credit card. You can borrow and repay the funds as many times as you want, as long as you have some of your credit line available.

Both options are secured by your home, meaning you risk foreclosure if you can't repay your loan. Because of that, think carefully about whether this is the right choice for you.

Nonprofit credit counseling

Nonprofit 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 are typically low-cost or free. Counselors can help you make a budget, get copies of your credit reports and scores, and develop a debt management plan (DMP).

A DMP involves a counselor negotiating with your creditors to attempt to lower your interest rates and possibly some of your balances. You make a single payment to your counseling agency, and they pay your creditors. There is typically a low upfront and monthly fee, and these plans can negatively impact your credit and won't always lead to better terms.

Debt settlement services

Depending on how much you're struggling, you may consider debt settlement. Debt settlement usually involves working with a third-party company to negotiate your balances and settle for less than you owe.

Debt settlement shouldn't be your first resort, as it can severely damage your credit. It's usually best for borrowers who have already defaulted on their debts. Otherwise, the debt settlement company may advise you to stop making payments while they negotiate with your creditors. As a result, your credit score is likely to drop, and there's no guarantee your creditors will agree to new rates or balances. You should usually only consider debt settlement to avoid bankruptcy.

FAQs

Bottom line

Regaining control of your finances and becoming debt-free is possible. Remember that debt consolidation is just one strategy for overcoming financial difficulties for military members. When consolidating your debt, committing to improving your overall finances is important.

With the help of specialized debt relief programs and initiatives for veterans like those in this list, you can pay off your loans, rebuild your credit, and leave debt behind.