Cognitive deficits and hippocampal atrophy, features that are shared with aging and dementia, have been described in type 2 diabetes mellitus (T2DM). T2DM is associated with obesity, hypertension, dyslipidemia, hypothalamic pituitary adrenocortical (HPA) axis abnormalities and inflammation, all of which have been shown to negatively impact the brain. However, since most reports in T2DM focused on glycemic control, the relative contribution of these modifying factors to the impairments observed in T2DM remains unclear. We contrasted 41 middle-aged dementia-free volunteers with T2DM (on average 7 years since diagnosis) with 47 age-, education-, and gender-matched non-insulin resistant controls on cognition and brain volumes. HPA axis activity and other modifiers that accompany T2DM were assessed to determine their impact on brain and cognition. Individuals with T2DM had specific verbal declarative memory deficits, reduced hippocampal and prefrontal volumes, and impaired HPA axis feedback control. Diminished cortisol suppression after dexamethasone and dyslipidemia were associated with decreased cognitive performance, whereas obesity was negatively related to hippocampal volume. Moreover, prefrontal volume was influenced by worse glycemic control. Thus, obesity and altered cortisol levels may contribute to the impact of T2DM on the hippocampal formation, resulting in decreased verbal declarative memory performance.