When I was applying to grad school, I was looking at MA programs in political science. One of the professors who helped me out a lot told me never to attend a grad school without funding, particularly in a non-professional/terminal degree program. I effectively ended up taking his advice, given I was funded the whole time, but, even if I hadn't been funded, I probably would have gone anyway. In retrospect, however, he was 100% right, and I was lucky to have avoided learning that the hard way. It's just not worth ending up with a ton of debt, especially for an MA in something like English.
My advice to you is to take the second offer, rock it for two years, and step up a notch when the time comes to get your PhD. I know a couple of people who did this. They started in middling-to-decent MA programs, but they were among the best students in their program. When the time came to move on to a PhD program, they wound up in outstanding programs (one in the second-best program in the country for her specialization). Doing this would allow you to get the degree that counts (the PhD) from a great school, but you wouldn't have to worry about the ridiculous debt load that comes with option number one.