"We’re debating whether we should keep or get rid of the names of the NPCs above their heads when the player gets close, on one hand, it’s really convenient, on the other hand, it does break the illusion somewhat. What do you all think?'
Just make it as option in settings with default on (show names), so those who want to disable showing names, can do so.
By default i would let it stay, because even if characters are different from each other you need to get used to them to be able recognize.