Boy, can I relate with your post. Been there and doing it again I should say. First off - when will your daughter be 7 years old? To compete level 5 USAG from what I understand the girls have to be 7.
My older daughter did level 4 AAU as a 6 year old and then level 5 USAG when she turned 7. She had a very difficult time with the transition. She went from winning level 4 state to getting very little in level 5 and really didn't understand. She wanted to know why the judges didn't like her.
There were a lot of tears and it was a difficult season for her and for us. She repeated level 5 which is what our gym does (2 years at level 5) and had a much better year as an 8 year old. She is now in her second year as a level 6 and she will have an awesome season. She had a practice meet last week and scored a 36.5.
My younger daughter has an April birthday. She did AAU 4 as a 5/6 year old and did very well and had a fun year. She was not old enough to compete level 5 USAG in the Fall, so did AAU 5 as a 6/7 year old and won every meet including state. This Fall she will do USAG 5 as a 7 year old and she is very ready, although I have given her the talk that this year will be much more difficult and she may not get as many medals as she did in the previous years. AAU is such a better division then USAG for the younger kids. When they are young, it is all about medals and everyone gets a medal at AAU. Does your gym do AAU?? This could be an option - routines are the same as USA the girls just get more time to prepare since competition season is in the Spring.
The kip is probably the hardest skill for level 5 and your daughter's coaches are probably thinking that since she has that the rest will come. Vault will be the same through level 7 so she has plenty of time to get her vault. Sometimes what the coaches do not understand is the mentality of a little one like yours. Coming out of such a winning season, there will be such disappointment for her going into a season with very little rewards. If you decide to let her stay with level 5 - prepare her. You can always discuss with your daughter the different outcomes and see what her reaction is. A lot of the time the coaches think of the gymnast and the gymnast they can become, but they don't consider the immature little mind that might become discouraged. Take it one step at a time and enjoy the ride. It can be such an awesome adventure when they enjoy it and such a great ego booster to their self esteem. Talk to your child's coach and find out what they are thinking about your daughter and then you as the "parent" make the choice that is right for your daughter. I hope that this has helped.