I'm not finding anything in Pub 721 or 575 about repayment of loans to deceased TSP participants, but maybe I'm not looking in the right place.  

Are you saying that if the TSP beneficiary had been the 10-year-old granddaughter, and the loan of $25,000 was paid off before she got the $5,000 that was left, the kid would have to pay tax on $30,000 income?