There's a lot to unpack here, at least if someone like me tries to post an answer, because I only half-agree with aims such as those of the Hemingway app. Also, some of what you say brings in additional issues.
the app pushes simplicity and the lowest possible reading level. Where I live, an illiterate person is defined as any person who reads below a grade nine level. The Hemingway app would have us writing for the semi-literate.
Obviously, some people are writing for that audience. As April already noted, technical documents aimed at "normal" people definitely need to do this, if only because if you want 99.9% of your adult audience to understand, well... you have to write for a reading age of about 10 (or if 99%, 14).
Novels for adults, on the other hand, can aim higher. Maybe not that much higher, though. If an average adult reading level is required, that's half your potential audience lost already (or possibly less if weaker readers never would have tried anyway).
The only context I've found as a writer where I could get away with demanding more than the average was when I wrote my PhD thesis, but even there I was wisely advised to limit sentences' word count to 25. (Obviously, longer sentences are tolerable when the content is less demanding, but, well, see for youself what my sentences therein were about).
Simple words often lack precision
That's not necessarily a bad thing, mind. A writer needs a second-order kind of precision, a precise control over how precise to be. The Old Man and the Sea opens, "He was an old man", not "He was a 67-year-old"; that would have been a worse alternative.
I was reading to my former student, so found myself choosing words based on his reading level. When he later told me he was not interested in my story, I realized I was free to write it as it ought to be written.
I can't say what issue your student had with your writing, but I bet he could have found something to like about it, or at least to admit didn't go wrong. The lesson to draw from this isn't that he would have liked more advanced writing at least as much. If you found another beta reader who would have found the story interesting, they might still have told you, "but the writing's too taxing".
I will not dumb my novel down.
Well, good for you. Bear in mind, however, that there's a difference between using words you have a right to expect readers to know (or at least tolerate) and this. Now, I'm not accusing you of planning on that approach, but you need to understand that "write like this, not that" advice is popularised based on the most common errors of newbies, and that is definitely one of them. "Gee," they think, "the novels we were forced to study in English were hard work, so I guess I'm supposed to write like that". Nor is it the only common mistake that boils down to authors doing unnecessary counterproductive work.
Has the bar truly been lowered so much that we are now encouraged to
write for the illiterate?
That may be the wrong way to look at it. You have to understand there was a time not so long ago when "normal" people had appallingly low education levels. I'll discuss this next point from a British perspective, so mentally copy-paste your own country of interest's legal history here.
Prior to the Elementary Education Act of 1870, almost half of children in England and Wales had no access to even primary school education; and an analogous expansion of secondary education as we understand the concept today took until well into the twentieth century, e.g. the school-leaving age became 14 with the Fisher Act of 1918 (this rose to 16 in 1973), and the post-11 ramp up to secondary-school material wasn't compulsory until the Butler Act of 1944.
So when people like Hugo (died 1885), Tolstoy (died 1910), Shelley (died 1851), Byron (died 1824) and Tennyson (died 1892) were writing, it was not for those of the least ability, or of the least free time and disposable income. Now we do, and they've had easier stories to consume since films were invented. You can love or hate the Hemingway advice - amusingly enough, the app critiques his writing - but the problem you're describing is not new. And the ongoing push to promote children's literacy through giving them something "fun" to read "at their level" has created a cottage industry of such writers, one of whom might be you one day. Don't be ashamed if it happens!
how to maintain clarity without losing precision?
They're not in the least mutually exclusive, especially if you consider my point above about second-order precision. Some of the most surgical things you'll do as a writer will involve consciously circumscribing exactly what a reader is confident they do and don't know at a given stage, and whether they're right. But in terms of "first-order" precision, I can't recommend this book strongly enough, even if its stated focus is on non-fiction.
Let me talk a little more about these automated attempts to compute reading levels. I've just copy-pasted a paragraph of mine into the Hemingway App and been told it's grade 10, but I know from prior experience other metrics can peg me at 5 or 6 instead, and you might be amused to see where speeches come in. I won't say they're meaningless, but the surest way to know whether your writing is too hard, too easy or just right is to ask another person.
I wrote a novel last year about a genius. A beta reader told me the challenge wasn't in the vocabulary; it was in the sentence structure. That was what I had to fix in a few places. To be honest, that's usually the case; it's much harder to accidentally use overly demanding words. I'll leave you to review whether your sentence length is too high, or too monotonous, or whether the way your sentences end up long is counter-productive. If you can't find another person to quiz on this, a good trick is reading the sentence out loud. I swear you'll voluntarily decide to edit many sentences if you do that.