I'm having the same problem.  The workaround that I found is to manually add your favorite songs to your SD card.  Then when you start the google music app, it will pick them up and treat them as part of your offline library.  Since they're on your SD card already, they won't be cached to your internal storage.  That frees up some room on your internal storage for other random songs. It's not an ideal solution, but it bought me some time.