For service members, the thought of going into debt isn’t as troubling as the thought of going into battle. After all, filing for bankruptcy is not usually a life-threatening experience.
But financial worries still keep plenty of service members up at night, and with good reason.
More than one-third (35%) of military personnel don’t pay their bills on time, according to a 2020 study commissioned by the National Foundation for Credit Counseling. It found that 54% of servicemembers are “just getting by financially.”
All of which is why an astonishing 86% say they worry about personal finances.
“Military families face a unique set of challenges when it comes to managing their household finances,” said Mike Croxson, CEO of the NFCC. “Many servicemembers are deployed overseas, which can make it difficult to stay on top of bills and financial obligations. Additionally, frequent moves can make it challenging to establish credit and maintain financial stability.”
Inflation has made things even worse. An April 2023 study found that 18% of servicemembers missed at least one loan or credit card payment in the previous 12 months.
There was some encouraging news from the 2020 NFCC survey, conducted by the Harris Poll:
- 66% of servicemembers graded themselves A/B on knowledge of personal finances, compared to 57% of the general population.
- Military families are more likely to keep a budget (56%) than civilian households (47%).
- 93% of military members contribute to a retirement account, compared to 70% of civilians.
It helps that there’s a federal law (the Servicemembers Civil Relief Act) that offers a wide range of protections against financial disaster for active-duty personnel. Among the measures, the SRA caps interest rates on credit cards and mortgages at 6%. It prevents lenders from foreclosing on homes and allows servicemembers to cancel leases without penalty.
That helps avoid totally sleepless nights. But the youth and financial inexperience of many servicemembers – especially enlisted personnel – makes debt a perpetual worry.
Here is what you can do about it.
Military Debt Consolidation Loan (MDCL)
If you’re thinking about debt consolidation, you should start with a hard look at this option. Servicemembers facing a financial crisis have a big advantage over civilians if they have a VA loan on their home. That qualifies them for a Military Debt Consolidation Loan (MDCL), also known as VA Consolidation Loan.
It operates similarly to a regular debt consolidation loan: you take out one loan to pay off all unsecured debts, such as credit cards, medical bills and payday loans. Then you make one monthly payment to one lender, instead of multiple repayments to all those creditors.
MDCLs are considered “cash out” loans. That means you are refinancing your current loan for more than the amount owed and taking the difference in cash. There are closing costs, which are subtracted from the final amount you receive.
So, if you owed $80,000 on your home, you might qualify for a $100,000 MDCL (depending on the appraised value of your home) and have $20,000 – minus closing costs – left to pay off credit cards, medical bills, or whatever unsecured debt you have.
The VA is the guarantor for your loan, but the new loan can’t exceed your home’s appraised value. Also, there’s a limit to how often you can take out VA loans if you have trouble repaying them.
The advantage of an MDCL is you typically pay a lower interest rate and closing costs than civilians, and far less interest than you would using credit cards. These refinancing loans can be spread over 10, 15 and sometimes even 30 years.
The obvious drawback is you lose the equity in your house while taking on more debt, and you pay closing costs. There may also be a prepayment penalty or a balloon payment.
Not every service member qualifies. Lenders will consider your income and credit score. Also be aware that in this process unsecured debt like credit cards becomes secured debt. This means your home is acting as collateral and you could lose it if you default on your mortgage.
Why Use a VA Military Debt Consolidation Loan?
A debt consolidation loan is an attractive option for service members looking for financial relief. That’s especially true if they have a VA loan and equity in their home – meaning its appraised value is higher than what they owe.
That said, research and ponder these factors before pulling the trigger.
Advantages of VA Military Debt Consolidation Loans
- Qualifying standards are easier than for conventional consolidation loans.
- Lower credit score and debt-to-income requirements, plus residual income (money left after meeting monthly financial obligations) are positives.
- Longer repayment terms.
- Up to 100% loan-to-value.
- No monthly mortgage insurance premiums or prepayment penalties
- Access to the Department of Defense’s Homeowners Assistance Program (HAP), which provides financial aid to military members.
- Up to 30 years repayment terms. No prepayment penalties.
- Lower closing costs than regular bank loans.
Disadvantages of VA Military Debt Consolidation Loans
While there are a lot of good reasons to consider Military Debt Consolidation Loan, there are some serious negatives to consider before a final decision.
- You will lose equity in your home.
- You will risk foreclosure.
- Paying closing costs can negate gains expected by consolidating debt.
Other Military Debt Consolidation Plans
Service members have other avenues for debt relief, depending on the circumstances and amount they owe. If the problem is confined to credit cards, they may be qualified to refinance credit card debt with a balance transfer card.
Several banks and credit card companies offer 0% interest on cards during introductory periods of 12-18 months. Most have a transfer fee ranging from 3%-5%, but if you pay off your balance in the introductory period is reached, you’ll come out way ahead. If you don’t, you’ll get socked by exorbitant interest rates.
Another option is to speak with a nonprofit credit counseling agency to see if you qualify for a debt management program. You may be able to reduce your interest rates and monthly payment without taking out an additional loan.
Other debt-relief options include:
- Special Forbearance: This could be granted if the bank temporarily suspends payments on your mortgage to give you time to avoid foreclosure. Lenders would do this for service members who expect a sudden cash windfall, either from inheritance, increased pay from combat duty, tax returns, etc.
- Repayment Plan: If you’ve missed a few payments, you could negotiate with the creditor and agree to resume payments with an extra amount added each month until the missed payments are paid off.
- Loan Modification: A VA Loan Modification is when a lender changes the terms of your loan in order to avoid foreclosure. The lender rolls all the delinquent payments into a new balance and begins a payment schedule.
- Short Sale: The borrower could convince the lender to sell the home for less than what is required to pay off the loan. In a short sale, the lender typically receives money from the VA to offset the loss.
- Deed in Lieu of Foreclosure: The borrower deeds the property to the lender instead of going through the foreclosure process.
- Postponing Foreclosure: The lender might agree to put off foreclosure to give the borrower more time to sell the home and pay off the loan.
- Leave No Veteran Behind (LNVB): This nonprofit provides education employment services for vets, including retroactive scholarships that pay off certain student loans.
- Debt Consolidation with Specialized Terms: Agencies have assistance options for service members who don’t own homes or don’t want to borrow against the equity in their homes.
- Interest Rate Reduction Refinance Loan (IRRRL): The Department of Veterans Affairs offers this refinancing loan that helps servicemembers get lower interest rates and avoid many out-of-pocket expenses.
Acceptable Closing Costs on VA Loans
Loan applicants often get sticker shock when they see closing costs, which can add a lot of money to what they’ll have to pay back. There are two significant rules to consider before closing a VA loan: origination fees and the VA funding fee.
The VA usually guarantees lenders 25% of the purchase of the home in case the borrower defaults. This is known as VA Loan Entitlement. In other words, if a service member or veteran buys a $100,000 home and defaults, the VA will guarantee the lender $25,000 toward paying off the entire loan.
That money comes from the VA Funding Fee, which is applied to every VA loan or refinancing. Rates typically range from 1.25% to 3.3%. They depend on factors like whether the applicant had a previous VA loan and the size of the down payment.
Members of the military reserve pay slightly higher fees than regular military. Members with service-related disabilities can be exempted from the fee.
Origination fees are what lenders charge for processing the loan. The VA caps the cost of origination fees at 1%. The fees must be paid at closing and aren’t part of your loan. In other words, that 1% has to come out of your pocket.
If the lender charges you an origination fee, it can’t charge you for escrow, mortgage brokers, underwriting or processing fees. Some VA loans don’t include termite or pest inspections, realtor fees or loan prepayment fees.
Other VA Loan Fees
Funding and origination fees aren’t the charges you might encounter. Other fees might include:
- Credit report
- Discount points
- Title insurance
- Real estate broker’s commission
- Escrow (taxes, insurance)
VA Loan Compromise
If you have VA debt due to a home loan guarantee, education loan or accidental overpayment of benefits, you might be eligible for a VA Loan Compromise. It’s similar to debt settlement, though you don’t need outside help.
The negotiation process begins by submitting a letter to the VA that explains your offer and specifies how much money you are offering. You’ll also have to submit a Financial Status Report, VA Form 5655. This determines your ability to pay and whether your offer is reasonable.
Fax the required paperwork to the VA’s Debt Management Center at (612) 970-5688. Or you can mail it to:
U.S. Department of Veterans Affairs
Debt Management Center
P.O. Box 11930
St. Paul, MN 55111
If your offer is accepted, you’ll typically have 30 days to make a lump-sum payment. Don’t send any money until you receive notice that the VA has accepted your offer.
Defaulting on VA Debts
When you can’t pay your VA loans, a compromise is one of the best options available. You may be eligible for a debt waiver, which similarly forgives all or part of your debt. Another option is to pay in monthly installments, a technique commonly used by those who are ineligible for compromises but cannot meet their payments.
Both options are better than not paying at all. The penalties for that will increase over time.
The VA will begin collection attempts by sending you a letter and possibly calling you. If you ignore these contact attempts, the VA will add interest and administrative charges to your balance after 30 days. After 60 days, the VA will begin offsetting any VA payments to you such as your military salary, disability compensation or pension. That means a portion of money will be taken from your check and applied to your outstanding debt.
After 180 days, the VA will contact the U.S. Treasury Department about your outstanding debt. The Treasury can garnish more types of payments to you and is not limited to VA benefits. Payments that may be reduced in order to pay your debt include non-military salaries, Social Security payments and IRS tax refunds.
If those benefits don’t apply to you, the VA can hire a collection agency or sue you in federal court. This could also happen if privately held debts go unpaid.
Defaulting on any loan will damage your credit score. Don’t ignore the problem and hope it will just go away. It won’t.
Other Military Debt Relief Options
Some things that created financial difficulties are unavoidable for military families. Things like frequently moving, spouses having problems finding or retaining jobs and a lack of financial experience.
Fortunately, there are organizations willing to provide debt relief for military families. Many are charities or 501(c)(3) organizations. While their funding may be limited, their willingness to help is not.
Some of the organizations worth contacting include:
- American Legion
- Army Emergency Relief
- Navy/Marine Corp Relief Society
- Operation First Response
- USA Cares
- Air Force Aid Society
- Coast Guard Mutual Assistance
- Disabled American Veterans
Military Debt Settlement
If you don’t own a home or are otherwise ineligible for debt consolidation, debt settlement is an option to consider.
Debts, including those owed to the VA, are negotiated down, usually through a debt settlement firm. The downside is debt settlement will severely ding your credit score.
Veterans can also settle debts with veteran-specific credit cards. They include:
- Chase military credit cards
- Visa Veteran Tickets credit cards
- Navy Federal Credit Union credit cards
- Air Force Federal Credit Union credit cards
- Auto loans for veterans, including those loaned by the United Services Automobile Association (USAA)
The benefits of credit cards listed above vary, but most have no annual fees or fees for balance transfers, cash advances and foreign transactions. Those incentives should reduce your credit card bills and the savings could be applied to debt settlement.
You can negotiate with lenders, hire an attorney, or choose a debt settlement law firm. If you choose the latter, shop around to make sure a law firm doesn’t charge excessive fees.
Once you choose an attorney, a credit counselor will study your game plan and help you determine how much money you can pay toward your debt each month. The counselor will then negotiate with your creditors to accept less than the full amount you owe.
Military & Veteran Student Loan Repayment Plans
Many veterans expect the GI Bill to cover all their college expenses. That’s often not the case.
If the college experience has added to your debt, one solution is to take out a student loan, just as millions of civilians have to pay back college debt. The good news is the military offers more loan repayment options for service members, especially those who enlist after completing college.
Some of the programs that either help repayment or wipe it out completely include:
- Military College Loan Repayment Program: The Army provides up to $65,000 in loan repayments on qualified federal loans for qualified enlistees or those who re-enlist. The Navy also offers up to $65,000 in repayment for three years of service. The Air Force has a similar program that pays up to 10,000.
- National Defense Student Loan Discharge: Offers a partial discharge of federal loans for those whose military service included at least one year in hostile fire or imminent danger areas.
- Veterans Total and Permanent Disability Discharge: Available to servicemembers who suffered total and permanent disability. If you have a TPD discharge, your Direct, FFEL or Perkins loans will be discharged.
- Army Reserve College Loan Repayment: If you have loans before you go on active duty and you are in a qualifying military occupation specialty and enlist for six years, you could have 15% of your loan balance up to $20,000 paid off.
- Health Professions Student Loan Repayment: Doctors, dentists, and other healthcare professionals could receive $40,000 a year in student loan repayments for up to three years.
- Air Force Judge Advocate General’s Corps Loan Repayment: Serve in the Air Force Judge Advocate General Corps and you could get up to $65,000 over three years to pay back loans.
Other programs are available to help manage student loan debt while serving active duty. Veterans get protection under the Servicemembers Civil Relief Act, which caps interest on student loans (and all other loans) at 6% for as long as you serve in the military.
Student loan forgiveness programs are available to some. Time spent in the military counts as part of 10-year commitment to working in the public service sector for the Public Service Loan Forgiveness Program.
The remaining balance of loan is forgiven after 10 years of on-time payments and applies only to William D. Ford Federal Direct Loans or loans consolidated in the Direct Consolidation Loan Program.
Servicemembers are eligible for deferment while serving active duty and could also enroll in any of the income-driving repayment plans that help reduce monthly payments. However, those plans do stretch out the time it takes to pay off a loan and do result in more interest being paid on loans.
Non-military Debt Relief Options
There are ways to pay off debt without any VA assistance. If that interests you, consider the following options:
- Balance transfer credit cards: They offer zero-interest promotional periods. You can transfer debt from other cards and save a ton on interest charges. But you must pay off the balance before the promotional period expires, or exorbitant interest charges will kick in.
- Personal loans: A bank, credit union or online lending site will always be eager to loan money to qualified applicants. They might also offer special terms for service members.
- Cash-out refinance: You refinance your mortgage for more than what you owe. You then pay off the old mortgage and use the difference to pay off other debts.
- Home equity line of credit (HELOC): You can draw from a home equity line of credit and repay it on a monthly basis. Check with your mortgage lender to see if this is an option for you.
Credit Counseling for Veterans and Military Members
If you’ve read this far into the story, your head might be spinning from all the information and programs. If that’s the case, reach out to a credit counselor.
A counselor will analyze your financial situation and help you wade through the relief options available to both service members and civilians.
Whether it’s a Debt Management Program, debt settlement, a consolidation loan or filing for bankruptcy, a counselor could devise a plan to get you out and keep you out of debt.
About The Author
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].
- Hirschfield, A. (2021, December 28). For veterans, bad financial choices while on active duty can spiral into decades of debt. Retrieved from: https://americanhomefront.wunc.org/2021-12-28/for-veterans-bad-financial-choices-while-on-active-duty-can-spiral-into-decades-of-debt
- N.A. (2023, April 18). Survey: Military Household More Severely Impacted by Inflation. Retrieved from: https://www.nfcc.org/press_release/inflation-and-military/
- N.A. (2020, November 9). Debt and delinquency after military service: A study of the credit record of young veterans in the first year after separation. Retrieved from: https://www.consumerfinance.gov/data-research/research-reports/debt-and-delinquency-after-military-service-study-credit-records-young-veterans-first-year-after-separation/
- Epperson, S. (2019, May 28). Military families say this is their top concern. Retrieved from: https://www.nbcnews.com/veteran-services/next-steps-for-vets/military-families-say-their-top-concern-n1010916
- N.A. (ND) 2015 Military Family Lifestyle Survey. Retrieved from: https://ivmf.syracuse.edu/research/research-highlights/military-family-lifestyle-survey/