A tough situation. My hat's off to someone who won't quit and to the instructor who hangs in there at least for awhile.

First thought ... you might consider having the student fly with another seasoned instructor for two or three flights to see if this sheds new light on the situation for you and/or the student.

Barring progress there ... one of my mentors said, "Bad news doesn't get better with time." If you haven't already, I think you owe the student an honest assessment at the right time based on your experience and knowledge. You could opt to put it in terms of pros and cons (we can continue flying together but I don't see you being cleared to solo, etc.). Sounds like you may also need to make a separate judgment call related to VA funding.

Best of luck.