"I think I will advise her to take the 401k loan and pay off the IRS. And then the 401k loan will be her only debtor."

This makes no sense. At her age, take the distribution.

If she decides she doesn't want to repay the loan, she ends up with a deemed distribution anyway.

And do you know if her plan allows a loan after terminating employment? Just because the IRS suggested it doesn't mean the plan provides for it. An ex-employee doesn't always have access to borrowing from their old 401(k) because there is no paycheck from which to deduct for repayment.