Debt Consolidation For Veterans & The Military

The benefits of debt consolidation – lower interest rates and reduced monthly payments on credit card debt – can be a lifeline for members of the military battling financial problems.

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Add “financial literacy” to the list of things members of the U.S. military are asked to fight on a daily basis.

Financial literacy is understanding and using financial skills to solve problems with budgeting, investing and money management. The results of the 2020 Military Financial Readiness Survey suggest it’s an ongoing battle for servicemembers.

The National Foundation for Credit Counseling sponsors the alongside Wells Fargo Banks and the Harris Survey company does the sampling. Some of the findings were not surprising, given how the COVID-19 pandemic treated the entire U.S. economy in 2020, but they were still disturbing.

For example, 35% of servicemembers said they do not pay their bills on time; 54% said that “just getting by financially” describes them very well; and an astonishing 86% said they worry about personal finances.

If that’s not distressing enough, more than one-third (36%) said they have taken out a cash advance or payday loan in 2020 and 51% used the gig economy to supplement their income. Only 33% of servicemembers with personal debt are very confident they can off their loans according to schedule and 57% say the way they manage finances causes conflict with their spouse.

There was some encouraging news from the NFCC survey, conducted by the Harris Poll:

  • 66% of servicemembers graded themselves A/B on knowledge of personal finances as 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 while on the civilian side, 70% contribute to retirement savings.

It helps that there is a federal law (the Servicemembers Civil Relief Act) that offers a wide range of protections against financial disaster for people on active duty. Among other things, the SCRA caps interest rates on credit cards and mortgages at 6%, prevents lenders from foreclosing on homes and allows military personnel to cancel leases without penalty.

Still, the youth and financial inexperience of many members of the armed services — especially enlisted personnel — make dealing with debt a regrettable part of the experience.

Military Debt Consolidation Loan

When members of the military encounter a financial crisis, or even just hit a temporary wall, there are ways to rally, especially if you have a VA loan on your home.

Having a VA Loan qualifies you for a Military Debt Consolidation Loan (MDCL), also known as a VA Consolidation Loan that can help you overcome financial difficulties. The MDCL operates on the same premise as a regular debt consolidation loan: take out one loan to pay off all unsecured debts, such as credit cards, medical bills, payday loans, etc. and make a single monthly payment to one lender rather than multiple loan repayments to multiple creditors.

Military Debt Consolidation Loans 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 involved, which get 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 house) and have $20,000 — minus the closing costs — left to pay off credit cards, medical bills or whatever other unsecured debt you have.

The VA is a guarantor for refinancing your loan, but the new loan value can’t exceed the appraised value of your home. Also, there is a limit to how often you can take out VA loans. if you have trouble repaying them.

The advantage of a MDCL is that 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 out over 10, 15 and sometimes even 30 years, giving you a wide-range of repayment choices.

The obvious drawback to this choice is that you lose the equity in your home, while taking on more debt. There also is the matter of paying closing costs, which vary depending on the lender. Other questions to ask should be whether there is a pre-payment penalty or if there is a balloon payment involved.

Be aware that you must meet certain qualifications to help ensure that you can and will repay the loan. Lenders will take into account your income and credit score when determining your eligibility. You also need to realize that this process takes unsecured debt like credit cards and turns it into secured debt. This means your home is acting as collateral and you could lose it if you default on your mortgage.

Other Military Consolidation Plans

There are other avenues for military members to get relief that depend on the circumstances and amount of debt you owe,

If your problem is confined to credit cards, you may be qualified to refinance credit card debt with a balance transfer card. Several banks and card companies are offering 0% interest on credit cards during an introductory period of 12-18 months. Most have a transfer fee, which ranges from 3%–5%, but if you pay off your balance in the introductory time period, you still come out way ahead.

Another option is to speak with a nonprofit credit counseling agency to find out if you qualify for a debt management program. You may be able to reduce your interest rates and monthly payment in a debt management program, without taking out an additional loan.

Other choices for debt consolidation – or to avoid foreclosure – would include:
  • Special Forbearance – A special forbearance could also 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 windfall of cash, either from inheritance, increased pay for combat duty, money from a tax return, etc.
  • Repayment Plan – If you have 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 new 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 some 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.

Why Use a VA Military Debt Consolidation?

There are some distinct advantages to being a service member or vet when you are considering a consolidation loan to take care of debt, but there are also some aspects you should research and think through before deciding.

Advantages of VA military debt consolidation loans include:

  • Qualifying standards for a MDCL loan 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) counts as a positive
  • 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 members of the military.

Disadvantages of VA military debt consolidation loans include:

  • Lose equity in your home
  • Risk foreclosure if you fail to make payments
  • Paying closing costs can negate gain expected by consolidating debt

Why Use a VA Military Debt Consolidation?

If you have a VA Loan and equity in home your home – it’s appraised value is higher than what you owe – the smartest path to eliminating high interest credit card debt would be to look into a Military Debt Consolidation Loan (MDCL).

Advantages of the MDCL:

  • Lower credit score requirements for qualifying
  • No monthly mortgage insurance premiums
  • Up to 30 years repayment terms
  • Lower closing costs than regular bank loans
  • No prepayment penalties

There also are the usual disadvantages associated with borrowing against the equity in your home such as losing the equity in your home; market values dropping and risk of foreclosure, but if you’re trying to eliminating high interest credit card debt and committed to reduced spending, this could be a great choice.

Acceptable Closing Costs on VA Loans

One of the overlooked aspects of every loan is closing costs, which often add a significant sum to the total amount being repaid. Banks and lenders dealing in VA loans are restricted by rules on how much they charge for closing costs.

There are two significant rules to consider before closing a VA loan: origination fee cost and VA funding fee.

The VA usually guarantees lenders 25% of the purchase price of a home, in case the borrower defaults. This is known as VA Loan Entitlement. In other words, if a service member or vet buys a $100,000 home and defaults, the VA will guarantee the lender $25,000 toward paying off the remaining balance of the loan.

The money to do that comes from the VA Funding Fee, which is applied to every VA loan or refinancing with rates ranging from 1.25% to as much as 3.3%, depending on the circumstances. Some of the factors determining the fee include whether there was a down payment and whether the borrower had a previous VA loan.

Regular military pay slightly lower VA Funding Fees than those in military reserves. Military members with service-connected disabilities can be exempted from the fee.

Origination fees are what lenders charge to cover the cost of processing the loan. The VA limits lenders to charging no more than 1% for origination fees. Origination fees must be paid at closing and aren’t part of your loan. In other words, you have to come out-of-pocket for the 1%.

If the lender charges you an origination fee, they can’t charge you for escrow, mortgage brokers, underwriting or processing fees. Some other fees VA loans don’t allow include termite or pest inspections, realtor fees or loan prepayment fees.

Other VA Loan Fees

There are other fees that can be involved in a VA loan in addition to the Funding Fee and origination fees.

Some of those fees to look out for include:
  • Appraisal
  • Credit report
  • Discount points
  • Title insurance
  • Real estate broker’s commission
  • Recording
  • Escrow (taxes, insurance)

Military Debt Settlement

If you are not a homeowner or are otherwise ineligible for debt consolidation, debt settlement is another option. This is a way of negotiating existing debts in order to reduce the total amount owed. It can be used for any type of debt, including debts owed to the VA.

Like civilians, veterans and active duty personnel can negotiate their privately-held loans such as credit card debt. This is often done with the help of a reputable debt settlement firm, though there is a severe downside to your credit score for choosing this method.

Veterans can also settle debts with veteran-specific credit cards, including the following:
  • Chase military credit cards
  • Visa Veteran Tickets credit cards
  • Navy Federal Credit Union credit cards
  • Air Force Federal Credit Union credit cards
  • Credit cards granted by Army credit unions
  • Auto loans for veterans, including those loaned by the United Services Automobile Association (USAA)

The benefits of credit cards listed above vary, but most carry no annual fee and no fees for balance transfers, cash advances and foreign transactions. The combination of those incentives should add up to substantial savings on your credit card bill and those savings could be applied to debt settlements.

Though you could do this process yourself or hire an attorney, most people begin the process by finding a debt settlement firm to help you negotiate your debts. Choose a reputable firm that does not charge excessive fees. The settlement firm will walk you through the process from there and answer any questions that may arise.

A credit counselor from the firm will speak with you about your financial standing and history, and then help set up a game plan. From there, the counselor will instruct you to set aside a certain amount of money each month, in accordance with the plan you’ve agreed upon.

After you’ve reached a set amount of savings, your counselor will contact your creditors to begin negotiations. The goal of this is to convince your creditors to accept less than the full amount you owe and dismiss the remainder of your debt. Once you complete this transaction, creditors consider your debt to be paid, and you do not owe any more money for that debt.

VA Loan Compromise

If you have a VA debt because of a home loan guaranty, education loan or accidental overpayment of benefits, you might be eligible for a VA Loan Compromise through the Department of Veteran Affairs. This is similar to a settlement but does not require the help of an outside firm.

Request a compromise by submitting a letter to the VA that fully explains your offer and why you are requesting a compromise. Be sure to specify the amount of money you’re offering to settle the loan. Along with your letter, you’ll have to submit a Financial Status Report, VA Form 5655. This is used to determine your ability to pay and whether your offer is reasonable.

Fax all the required paperwork to the VA’s Debt Management Center at (612) 970-5688. If you prefer, you can instead mail your paperwork to the following address:

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 the lump sum payment. Do not 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. In some cases, 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.

All of these options are better than the alternative of not paying at all. If the VA notices you have an outstanding debt, it will increase the severity of its reaction 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 these benefits do not apply to you, the VA can either hire a collection agency or sue you in a federal court. This could also be the outcome for privately held debts that go unpaid.

Defaulting on a VA loan will have a dramatic negative impact on your credit score and could keep you from exercising your option to

No matter what kind of debt you have or how tight your budget is, you have various debt reduction strategies at your disposal. Take advantage of these options rather than ignoring the problem.

Military & Veteran Student Loan Repayment Plans

Most veterans expect the GI Bill to cover all of their college expenses and for some, it does. However, for many, especially those with a family, there isn’t enough money in their GI Bill checks to get through the month, let alone a whole semester.

The quick and seemingly painless solution is the same one most civilian students use: take on a student loan. Federal student loans provide between $5,500 and $12,500 a year and there is no credit check so any bumps on your credit report won’t matter.

That certainly helps pay the bills every month while you’re in school, but once you graduate there is the matter of how to pay back student loan debt. Fortunately, being in the military offers more loan repayment options than civilian classmates, especially for those who enlist in the service after completing college.

Members of the military, especially new enlistees, could receive help from several loan forgiveness programs not available to civilians. They also have access to the same income-driven repayment choices civilian students do.

Unfortunately, the lenders who service student loans, don’t always advise servicemembers of the options available. In fact, the federal government has ordered the leading student loan servicer, Navient, to repay members of the military $60 million for violating protections outlined in the Servicemembers Civil Relief Act.

Some of the programs that either help repayment – or wipe out student loans 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, paying 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 the 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, are in a 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 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.

There are other programs that should help veterans manage their student loan debt, while serving active duty.

Veterans receive protection under the Servicemembers Civil Relief Act, which caps interest on student loans (and all other loans, for that matter) at 6% for as long as you serve in the military.

Time spent in the military counts as part of 10-year commitment to working in 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 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.

Other Military Debt Relief Options

Some of the factors that create financial difficulties for military families are unavoidable. Things like frequently moving; spouses having problems finding or retaining jobs; and lack of financial experience make military families especially vulnerable to money problems.

Fortunately, there are a number of organizations willing to step in and provide debt relief for military families. Many of these are charities or 501(c)(3) organizations and while their funds may be limited, their willingness to offer assistance is not.

Some of the organizations worth contacting include:
  • American Legion
  • Army Emergency Relief
  • Navy/Marine Corp Relief Society
  • MilitaryOneSource
  • Operation First Response
  • USA Cares
  • Air Force Aid Society
  • Coast Guard Mutual Assistance
  • Disabled American Veterans

Most lenders and nonprofit organizations are sympathetic to the problems that go along with being part of the U.S. military. Don’t hesitate to call and talk to these groups about the best ways to dig out of debt. They respect your service and are happy to help.

About The Author

Bill Fay

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].

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