You are considered in default if you have not made a loan payment by the end of the calendar quarter following the quarter in which the payment was due. As a result of a default, your loan will be deemed to receive a distribution from your account. The distribution made on your account is considered a taxable distribution based on IRS rules. The entire outstanding loan balance will be reported to the IRS as a taxable distribution. This will then be treated as a taxable income to you and may be subject to a 10% excise tax for early distribution. A 1099-R will be issued for the defaulted amount.