Windows 7 laptop’s volume with headphones way too loud

Do you have a set of external speakers connected to this machine at all, or available to plug in?

Some sets of speakers have a headphone socket on them also and, if you have a set that has one, it may give you a better signal than direct from your "line out" connections.

I have several sets of speakers for my PC's and most have a headphone socket which gives a great range of volume with my headphones.

This stuff isn't going to help you, please see Update 1:

Go to your Control Panel and open the Sound dialog. In the Playback tab, select your speakers and click Properties in the lower-right corner. In the Speakers Properties dialog, go to the Levels tab and adjust your output levels as appropriate.

Update 1

Looking through reviews, this is a common complaint with these speakers. The lowest volume setting is simply too loud, and the lack of a volume control exacerbates this issue.

Previous versions of Windows included several (sometimes 3 or 4) different places to control the output volume to your speakers. Windows 7 did away with this confusion by setting just one master volume control and then per-application settings.

In it's default configuration there is no way to manage the volume as you desire in Windows 7. Your solutions all require modifying or adding to your computer setup:

• Install a software volume control. This may or may not work. https://www.google.com/search?q=computer+volume+control+software
• Install an analog volume controller in your speaker connections. I assume these exist, though brief searching did not turn up anything promising. A particular problem in your case is that it'll need to have three stereo channels so it can adjust the volume on all 5.1 of your channels.
• Get a new set of speakers. Due to this being a known issue with your speakers, the least complicated solution is to find a set of speakers which include a volume control.

UPDATE: volume control software

In researching a different answer, I found a volume control software tool that can replace the Windows volume control. I don't know if it has more fine-grained control, but it's free and probably worth a try. AudioSliders by CodeSector: http://codesector.com/audiosliders

Also, the volume control in my Windows 7 goes down to 1, not just 5. Maybe try changing your mouse sensitivity or change the volume using the arrow keys on your keyboard.