Just to put some "real" numbers out there...
I estimate that over 3 years (the time horizon you suggested, SJ) if you're paying the minimum on your credit cards, you'll pay about $4800 in interest.
Ignoring the 20% minimum withholding under the assumption you'll get that back at tax time, you'll need to take $14.7K out of your 401K to pay your $13.2K in debt and cover the 10% excise tax. Assuming a 7% market return AND that you put your $500 / month savings back into the market at $6K / year, you're giving up $661 in additional interest over the same 3-year period.
It sounds like you need the money, however, so you may not put it back in the market (too risky for short-term investing), so if you put the savings into 4% bonds, you're foregoing about $867 instead.
If you spend the money, or lump it in a savings account, you're foregoing the entire $3300 in interest.
If, on the other hand, you follow the recommendations of the "buck up" crowd on this thread, I figure you'll pay about $1250 over 3 years paying those loans down at $500 / month + your usual car loan payment, starting with the highest rate and working down.
So, here are your scenarios:
1 - pay down and put back into the market @ 7%
2 - pay down and put into bonds @ 4%
3 - pay down and the savings get used for whatever
4 - find $500 / mo in savings
|scenario||10% penalty||foregone interest||saved interest||savings / (expense)|
Whatever you decide, just make sure you don't end up like MoonPilgrim's beau:http://www.mrmoneymustache.com/forum/journals/moonpilgrim's-tough-stuff/msg24877/#msg24877