How can interest continue to accrue on an amount that has already been taxed?

The loan is only considered 'defaulted'. The defaulted loan amount plus accrued interest must be paid off at some point. Until it is paid off, the loan is still active and is considered part of the plan (in accord with IRS regulations). When the loan is paid off, the defaulted amount will not be taxed again upon withdrawal.

Nothing contained herein is intended to be, nor should it be construed as tax or legal advice. If you have a tax question or legal question, please consult your tax professional or attorney.

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