Armed Forces Educational Assistance Act of 1981

Armed Forces Educational Assistance Act of 1981 - Establishes an educational assistance program for members of the armed forces, members of the Selected Reserves, and persons who enter active duty after the effective date of this Act. Entitles such members to a monthly allowance, limited to 36 payments and based on years of service, while pursuing a program of education at an approved educational institution. Authorizes the Administrator of Veterans' Affairs to adjust such payments each year consistent with the cost of attendance at such institutions. Excludes active duty as cadets at service academies for purposes of such payments.

Allows members who are entitled to educational benefits and who have completed ten years of active service to transfer all or any part of their entitlement to their children in accordance with provisions and limitations of this Act. Prohibits reserve members from transferring such benefits to their dependents or spouses.

Provides that any persons entitled to educational assistance must use such entitlement within the ten years after their last discharge or release date. Sets forth procedures extending any applicable time period for such persons who are prevented from initiating or completing a program of education under certain circumstances.