Cotton does stretch out with use or wear, but will shrink back to the knitted size when washed. The problem may not be with the bag so much as how you did the handles. If you just knit a strap, that's going to stretch and stretch. You could make it a lot shorter and that could work, or do a different type. With my bags I made them in the round from the bottom and when I got nearly to the top, cast off some sts at the beg of the round and halfway around, then cast on a few more sts on the next round so the handles were a bit larger, then worked a couple more rounds and bound off. If you want a shoulder bag, you could cast off only about 2-3" of sts, but cast on about 8" worth to make them longer. Then you would have the handles doubled and they're less likely to stretch as much as a single strap.