1/4 inch elastic probably is being held "stretched" by your fabric. Since you are trying to to shorten your fabric by approx. 1/3 I would try doing a sample (10" of fabric and what length of elastic takes it to 6.5 - 7 inches) and then use the resulting ratio on your scarf. I will bet that your elastic length still needs to be shorter.
I also had a similar problem once when I was using elastic that had been around for "a while" and I believe that it had lost some of it's ability to "spring back".
I have made a scarf along these lines where you used regular thread on the top of your machine and elastic thread in the bobbin. In order to do this you need to hand wind a bobbin and make adjustments to bobbin case tension as well as stitch length so not as simple as it would seem.
Good luck,