Cognitive dysfunctions such as mild cognitive impairment (MCI), Alzheimer’s disease (AD), and other forms of dementia are recognized as common comorbidities of type 2 diabetes mellitus (T2DM). Currently, there are no disease-modifying therapies or definitive clinical diagnostic and prognostic tools for dementia, and the mechanisms underpinning the link between T2DM and cognitive dysfunction remain equivocal. Some of the suggested pathophysiological mechanisms underlying cognitive decline in diabetes patients include hyperglycemia, insulin resistance and altered insulin signaling, neuroinflammation, cerebral microvascular injury, and buildup of cerebral amyloid and tau proteins. Given the skyrocketing global rates of diabetes and neurodegenerative disorders, there is an urgent need to discover novel biomarkers relevant to the co-morbidity of both conditions to guide future diagnostic approaches. This review aims to provide a comprehensive background of the potential risk factors, the identified biomarkers of diabetes-related cognitive decrements, and the underlying processes of diabetes-associated cognitive dysfunction. Aging, poor glycemic control, hypoglycemia and hyperglycemic episodes, depression, and vascular complications are associated with increased risk of dementia. Conclusive research studies that have attempted to find specific biomarkers are limited. However, the most frequent considerations in such investigations are related to C reactive protein, tau protein, brain-derived neurotrophic factor, advanced glycation end products, glycosylated hemoglobin, and adipokines.