Why does my 32 GB itouch only hold 4,500 songs?

so the 32Gb ipod touch is supposed to hold 7,000 songs. mien only can fit barley 4,500 i have about 20 MB in apps so i know thats not the problem, and about 100MB in pics so that still wouldn't let me ge tup to 7,000. now i look at the file sizes of all my songs in itunes and they are huge! like most are 7-10MB! thats not right, about half the songs used to be small MP3 files or WMA which are also small. and that was fine, but when i got an ipod and i had to use itunes i copied all those files over to itunes and it converted them to MPEG-4 which are mive files...is there a way to maybe convert all them to AAC which is a smaller file maybe? will the effect the quality of the music? also, you cant edit MPEG-4 files in any audio editing software which is VERY annoying.