You will get taxed on the remaining balance based upon your personal tax rate PLUS you will get hit with a 10% penalty on that as well.

So, let's say you borrowed 10,000. You've paid back 1/2 of it and now you still owe $5,000. If you default you'll owe taxes on it of about $1,000 PLUS you will get a $500 penalty.

Now, here's the trick. Theloan won't default until the end of the quarter FOLLOWING the quarter of default. So it won't be taxed until 2008 (ie you won't owe it until April 15 of 2009).

I don't advocate defaulting on the loan because it's a lot of money that's basically a penalty to you and your retirement. But if you have to do it then contact your payroll and ask that the payroll deductions stop. Benefits Consultants argue back and forth on whether you can do this...but if you force the issue your company will probably do it. Then, and this is very important. Ask that your withholding be increased effective 1/1/2008 by the amount of tax +penalty you owe divided by 12. You do this so your est. taxes are paid on a monthly basis instead of having to come up with it all at once.

Good luck.