I'm new here and just trying to find my way around, but from a point of a newbie I'd go all for option two. I know you guys are used to the plot and everything, but do you have any idea how confusing it can be for a new player?
So, basically, if the aim is new players and increased activity, I'd go for restart. Actually, for a restart without the big bad guys or big bad plots. The excitement and plot could be about other things. About the race to "who will make complicated electronics work in Hogwarts?", about discovering Atlantis, about encountering new species... You know. The old big, bad guy plot has been beaten to a pulp by now in so many RPs that it could be really refreshing to see a RP without war.
Besides, it would shift the attention back to Hogwarts and narrow down the places where you can post, therefore - more interaction. If you would actually opt for the reset, I'd even say, that you should remove the out of Hogwarts world completely.
But, then again, I do understand the old players that don't want to give up their chars. I wouldn't want it.