Ockham's Spoon

In my mind the real question is what does it mean for characters to lose their humanity? Do they become amoral killers? Do they start growing scales and tentacles? Is the condition fatal or do they just become something else? Once you nail down exactly what it means to lose their humanity, you can assign mechanical effects in gaming terms, using some of the excellent suggestions already put forth.

What did the principal do when he found a group of boys in the bathroom having a competition to see who could pee furthest up the wall?

You can also pull some mental powers, like The Voice that the bene gessiret used in Dune. Sound-based, but a very different flavor

Given how easy it is to be anything you want to be on the internet, it is amazing how many people choose to be stupid.

Devil: "And here is the pool of lava where you will spend the rest of eternity" Me: "Well, technically it is magma since it is underground" Devil: "You do realize this is why you are here"

I got an email from my parents that included a zip file with 42 photos of their recent trip to Yellowstone National Park. I knew right away it was a phishing scam. Parents send way more pictures than that.

Sign posted on the fence of a farmer's field: "Farmer allows walkers to freely cross this field, but the bull charges."

My neighbors with young children complained that they can hear my loud groans during morning sex while they are trying to get their kids ready for school. I explained to them I was just trying to put on my socks.

My wife asked me what I did this afternoon. I told her I cleared out some space in the freezer. I figured that sounded better than saying I polished off a tub of ice cream.

Please tell me there is a joke in the fact he misspelled marshmallow

Solid, unless your children are adopted

A cop pulled me over and looking at me said "Your eyes are awfully red. Have you been drinking?" I replied "Well, your eyes are glazed, have you been eating donuts?" We both laughed and laughed. I need bail money.

The dragon could have died from any number of things, not the PC's necessarily, as Christopher suggested, so you can avoid having the PCs be uber-powerful at the start. Alternatively, maybe they had to sacrifice some of their power to be able to defeat the dragon in the first place (like Ged closing the magic rift in Ursula LeGuin's book The Farthest Shore). That could lead to an interesting situation where everyone expects great things of the PCs but they really aren't that powerful anymore. That said, you would really have to explain things to your players ahead of time, because most player hate it when their character becomes weaker.