The 46-year-old has spent the last two years working with Pompey's academy and completes manager Guy Whittingham's backroom staff.
"I have to thank Guy for giving me this opportunity. It's been a pretty tough year for me and my family, but this is a proud day for me," he told the club's official website.
"It was difficult to leave the academy after a wonderful two years with some fantastic staff who have helped me along the way.
"I owe a lot of thanks to Andy Awford (academy manager) who brought me back into the club and has shown me a lot of support.
"It took a lot of thought, but you only live once and I couldn't turn down the chance to work with the first team."
McLoughlin spent close to eight years as a player at Fratton Park, making over 350 appearances between 1992 and 1999.
Whittingham added: "Alan's a good coach, but was also a great player here and is someone who knows this club inside out.
"It's something we've had in mind for a long time now and we're delighted it's all been finalised."