Why does my dragon's level reset but not its stars?

Because they're two different systems — one disposable, one permanent. It's the number one trap for new players.

• Reign Level (the dragon's level) rises through combat (XP from enemy troops killed) or by feeding it Meat. It sets the max army size and the 4 stats. It resets every season, because it's tied to that season's stronghold.
• Star Rank (stars) rises only by accumulating that dragon's Relics (at the Hatchery). It raises stats, unlocks Habits and ability tiers. It never resets.

So at the start of a Reign, a 10★ dragon goes back to level 1 but keeps its 10 stars, its Habits and its unlocked abilities. You only re-grind its level. Invest in stars: that's the effort that follows you Reign after Reign.