USNA Midshipmen Pay and Financial Literacy - Professional Knowledge Series

One of the truly amazing things about the United States Naval Academy is the fact that midshipmen not only go to school for free, but they also receive compensation for their active duty status in the United States Navy. 

Congress authorized the midshipmen base pay at 35% of the base pay of an O-1 (an Ensign in the Navy/2nd Lieutenant in the Marine Corps), which is appropriated to fulfill military and academic obligations while at the Naval Academy. 

As a result, teaching Midshipmen the fundamentals of financial literacy is critically important and done during the second week of Professional Knowledge!

In this section of professional knowledge, the plebes will learn about the Midshipmen pay systems, so they can have a general understanding of where their money is going, and about personal finance and money habits to help midshipmen achieve financial goals and success.  And while understanding financial literacy is important for their own personal benefit, it is also tremendously important to best guide, mentor, and support their future Sailors and Marines who are seeking financial help.

Here is a breakdown on the kind of information they are learning this week:

• Understanding the Midshipman Pay System

Midshipmen earn just over $1000 per month (nice, right??) but much of that is deducted to pay for services and loans provided to midshipmen.  Additionally, midshipmen pay is subject to Federal Income Tax Withholding, Federal Insurance Contribution Act withholding, State Income Tax withholding.  After the deductions for the ACE loan, SGLI, Books, Held Pay, Taxes, etc., the net monthly pay, which is paid once a month, at the beginning of each month for the previous month (Paid on 01 September for the month of August), is: 

• $125 for 4/C Midshipmen
• $200 for 3/C Midshipmen
• $300 for 2/C Midshipmen
• $500 for 1/C Midshipmen 

ACE Loan… SGLI… Held Pay… what are those??

The Advance for Clothing and Equipment (ACE) loan is an interest-free loan of $8,500 that funds the initial mandatory gear, uniform, and equipment costs during Plebe summer.  But don’t you worry, they can’t mess up paying the loan back because all midshipmen are placed on an automatic payment plan to fully repay the ACE loan by the fall of their firstie year.

The Servicemember Group Life Insurance (SGLI) provides coverage at a rate of 6.5 centers per $1000 of coverage.  As a default, all midshipmen are given the maximum coverage of $400,000 but can elect to reduce their coverage in increments of $50,000.

Held Pay, quite frankly, is a midshipman’s best friend. 

IN MOST CASES (there are a couple of instances this may not be the case, which we will discuss later) … Three times a year (February, July, and November), 3/C, 2/C, and 1/C midshipmen will receive a nice lump sum of money as a direct deposit. 

But what many people don’t realize is how Held Pay actually works.  Held Pay is an account used to ensure sufficient funds are available to meet future mandatory payments.  For example, Midshipmen are issued new uniforms during their second class year and books for their core classes each semester, and those items are paid for using the money in their Held Pay accounts. 

In order to ensure that happens, money from every payday is put into a midshipman’s Held Pay account. For example, if a plebe makes $1000 per month, pays $600 in deductions, and receives $125 in the direct deposit into their account, the remaining $275 would be deposited into the Held Pay account.

However, in order for Held Pay to be released as a direct deposit into your bank account, midshipmen must accumulate a large enough sum in their Held Pay account.  In order for Held Pay to be released to a midshipman, their account balance must be above the following minimums:

• $1500 for 3/C
• $1350 for 2/C
• $1000 for 1/C 

Well… why would some midshipmen not reach the minimums and therefore not receive a Held Pay release?

The Mid Card

The Mid Card is an interest-free credit card provided by the Naval Academy Business Services Division (NABSD) which allows midshipmen to purchase items from the Midshipmen Store, Uniform Store, and Textbook Store.  However, the money you charge on your mid card is paid off using your Held Pay account.

Soooooooo, the more money you charge on your mid card, the less Held Pay you will be entitled to.  

I used my mid card for every single textbook issue, and I still received held pay at every single opportunity.  Unless midshipmen use their mid card on frequent occasions, they will likely see direct deposit releases during the scheduled times.

But the question everyone wants to know… is there any way a midshipman can make even more money?

Outside Funds

A not well known fact is that outside funding, such as scholarships, may be applied to your pay account.  Midshipmen are entitled to apply and receive scholarships for their entire four years at the Naval Academy. 

As of 2018, The estimated total cost for the ACE loan, gear, uniforms, and core course textbooks is $17,500. That $17,500, by default, is budgeted to be paid out from your monthly pay. 

However, midshipmen are absolutely able, and encouraged to apply for outside funding up to $17,500 as it increases the value of your Held Pay account. Authorized outside funds include personal checks, public or private scholarships, and college savings plans such as the state 529 plans.

Checking on your Money

MyPay is an online pay account management system that provides pay and tax information for military members.  Hosted on the MyPay website is the Leave and Earnings Statement (LES). The LES is a monthly pay statement showing your entitlements, deductions, and tax withholding information.

When I was a midshipman, I literally never logged into my MyPay account and never once looked at one of my LES.  However, I can’t stress enough the importance of checking your LES, because at the end of the day, it is the responsibility of the midshipman to monitor their own pay, identify any issues, and get those corrected through the disbursing office.  Also, now that I’m all old and stuff, I check my LES monthly to ensure that all my pay is correct. Checking your LES is a great habit to get into to ensure your financial situation is correct, and you are getting paid as much as you should be!

PERSONAL FINANCE

In the second portion of this professional knowledge section, midshipmen learn about financial tools and money habits that will contribute to financial success. Midshipmen learn about the basics of checking accounts, savings accounts, stocks and bonds, mutual funds, Exchange Traded Funds (ETFs), Roth and Traditional Individual Retirement Accounts (IRAs), Credit Cards, the Career Starter Loan, compound and simple interest, and good money habits that are strongly suggested for midshipmen to acquire.

This section of professional knowledge is very brief, which makes sense regarding how complicated the finance world is, and how little time plebes actually have to study professional knowledge.

Thanks to my brother being a HUGE nerd, I have gained a very large interest in the world of personal finance.  In my opinion, an understanding of macroeconomics, including currencies, inflation, and deflation, is becoming SUPER relevant today. 

Through conversations with my brother and other mentors of mine in the military community, I have developed a much better understanding of the finance world.

If you have any desire to learn more about finance or give the gift of financial education to someone, I have tons of book suggestions that strongly helped my development.

The first is a MUST read!

Doug Nordman is a USNA grad and served for 20 years as a submarine officer and now lives in Hawaii.  I met Doug at the 2018 Military Influencer Conference and he has been a tremendous mentor of mine ever since. Simply put, “The Military Guide to Financial Independence & Retirement” provides servicemembers, veterans, and their families with a critical road map for becoming financially independent! 

The Military Guide to Financial Independence and Retirement

It is a super short and quick read that provides great information for all military families. Check it out! https://amzn.to/2KFcvzG

The next are books that I recommend to anyone seriously interested in the financial world!

Introductory books, good to read first:

Little Book of Common Sense Investing

Author: Jack Bogle

Grant’s notes:  This is a really good starting place.  Very simple material. Obvious bias note: the author, Jack Bogle, is basically the founder of index funds.  Thus, very pro index funds.https://amzn.to/31K6c3q

A Random Walk Down Wall Street

Author: Burton Malkiel

Grant’s Notes: The author is a finance professor.  He is an advisor for a service called Wealthfront, which basically makes investing in index funds incredibly simple.  He wrote this book before becoming an advisor for the company, so no real conflict. Bigger note here is, the book is very academic - a general critic of academics is that it just searches for very pure, beautiful solutions, and can sometimes ignore real life to get there. https://amzn.to/2YZOBHH

 And for a more advanced look:

The Black Swan: The Impact of the Highly Improbable

Author: Nassim Taleb

Grant’s Notes: I love this book.  Nassim Taleb is generally a fascinating author, with some other really interesting books like "Skin in the Game".  In general, he attacks the assumption that the world changes linearly and instead explores the possibility that the world moves in big crazy movements, that when examined out over a long enough time period, can look smooth.  This would be the anti-thesis of a very "academic" approach to the problem. To be fair, common critiques of Nassim Taleb are that he takes a very "holier than thou" approach, and can be a little preachy. Nonetheless, I think understanding both sides of the argument is critical for forming your own opinions. https://amzn.to/31LcKid

If you are interested in the topic of Midshipmen pay, loans, etc - please listen to the Military Money Show Podcast in which I am a guest talking about this topic. 

Grant is a graduate of the United States Naval Academy class of 2017 and is a cryptologic warfare officer. He is also the founder of Academy Insider LLC.  You may reach out to Grant with questions at [email protected].  

To learn more about the Naval Academy through the perspective of a midshipman/recent graduate - subscribe to his podcast the Academy Insider Podcast with Grant Vermeer on iTunes, Google Play Music, Stitcher and Spotify.

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