With baby/kids quilts it's a balancing act: less quilting is snugglier, but it also allows the batting to bunch or shift from rough use. Personally I would get a rainbow variegated thread and do a line of quilting 1" in from the sashing. I think this would avoid quilting over the applique. I would go edge to edge, over the sashing and thru the blocks (to Great Auntie's quilt we go...) Remember that the 8" measurement is in every direction. If you measure the blocks diagonally, are they less than 8?
Very cute quilt!!