She is now retired so I don't know how that affects the ability to default on the loan.If she retired from the employer who held the 401(k) in or after the year she turned 55, there will not be a penalty to pay on the 401(k) - at least from the Federal level. State penalties may also be waived, if the state follows the Federal rules.So, if she is making payments on the loan on her own, she could default by stopping payment on the loan. If the payments are from a payment that she gets from the former employer, they may or may not let her default.AJ
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