While I agree that a straight up withdrawal makes 'no sense', what about these options?
1) talk to the loan servicer and see if they are willing to negotiate either a lower interest rate or a reduction in principle. If the principle reduction is low enough THEN is MIGHT be plausible to withdraw the money from the 401k. In this scenario, the principle reduction is effectively paying the taxes. If the interest rate is lowered and the interest rate on a 401k LOAN is even lower than that, then taking our a loan from the 401k would make sense (but if you have left that employer already, this is not going to be an option)
2) consider whether you are eligible for a 'hardship withdrawal' under the IRS rules. if you can avoid the 10% penalty, it MAY be an option.
3) are you still working? if not, maybe the best option is to default? why continue to pay this obligation? this approach has it's downsides so best to discuss with a professional before executing on this option.
