... cheaper to pay Ph.D. students than full time staff you mean? Or am I reading this wrong?
As I wasn't exactly an all-star in undergrad (3.52), I'm trying the route of getting a masters at a second tier school (and attempting to be an all-star while I'm there) in the hopes of leveraging that to get into a top tier school.
Also gives me an easy way to bail if I find I don't like it as much as I hope I do.
Of course, if this plan is idiotic, someone should point that out. The CS school employs a lot of Masters students for TA/RA positions, so I'm not too worried on the money front.
Another situation with foreign grad students is that they get here, and after a year or two of abuse in a lab, they go get a life, and get married or (iff female) get pregnant. Then, their work ethic trends "Average American" and they adopt the "take this job and shove it" attitude.
You're better off applying for a Ph.D. program, then bailing after earning your Master's. It's not good for the school, but it's better for you.
Your understanding of the problem is what's wrong, not your analysis. You're thinking of the Ph.D. pool and the Master's pool as independent of each other. They're not. Funding for Master's and Ph.D. students comes from the same pool, and many programs won't admit students they won't fund. So the question sometimes comes down to, "Do we admit this Master's student or this Ph.D. student?"
Ph.D. students are an investment: they eventually publish papers with the university's name, and in academic settings, the university's name will forever be attached to that person. Master's students often don't publish, and upon graduation are generally not in circles that care about pedigree.
It's a silly game, and you have to play it right. If you want a master's degree and are unsure about the PhD, apply to a PhD program. If you just want a master's, apply to a PhD program. If you would rather stab yourself than stick around for a PhD, apply to a PhD program. If you want to be treated decently, have research opportunities and perhaps some money, apply to a PhD program.
In a nutshell, if you want to go to grad school, apply to a PhD program.
Luckily I was accepted into a decent school with an assistantship and the ability to switch to PhD if I want to.