Elevated free fatty acid (FFA) induces lipotoxicity, attributed to diabetes and cognitive decline. Sterol regulatory element-binding protein-1c (SREBP-1c) regulates lipid metabolism. We investigated the roles of FFA in mild cognitive impairment (MCI) of type 2 diabetes mellitus (T2DM) patients and determine its association with rs11868035 polymorphism. We recruited 191 Chinese T2DM patients into two groups through Montreal Cognitive Assessment. Demographic and clinical data were collected, multiple domain cognitive functions were tested, plasma FFA levels were measured through ELISA, and SREBP-1c rs11868035 genotype was detected using the Seqnome method. In comparison with the healthy-cognition group (n = 128), the MCI group (n = 63) displayed lower glucose control (p = 0.012) and higher plasma FFA level (p = 0.021), which were independent risk factors of MCI in T2DM patients in multivariate regression analysis (OR = 1.270, p = 0.003; OR = 1.005, p = 0.036). Additionally, the plasma FFA levels of MCI patients were positively correlated with Stroop color word test-C time scores (r = 0.303, p = 0.021) and negatively related to apolipoprotein A1 levels (r = -0.311, p = 0.017), which are associated positively with verbal fluency test scores (r = 0.281, p = 0.033). Both scores reflected attention ability and executive function. Moreover, the G allele carriers of rs11868035 showed higher digit span test scores than non-carriers in T2DM patients (p = 0.019) but without correlation with plasma FFA levels. In T2DM, elevated plasma level of FFA, when combined with lower apolipoprotein A1 level portends abnormal cholesterol transport, were susceptible to early cognitive impairment, especially for attention and execution deficits. The G allele of SREBP-1c rs11868035 may be a protective factor for memory.