In a perfect world, I could give 100% guarantee to the second-year PhD student that he could move with me to the new U, and get his PhD from the old prestigious U. I understand his reasons for wanting his PhD from the institution that is more desirable abroad - I would be pushing for the same thing if I were in his place.
As an adviser I hesitate to guarantee this path because of money. I am unable to fund him until the end of his PhD using start up funds from new U. This is because new U. doesn't want to pay old U. tuition for a PhD candidate that goes to old U. - I get that. So student can be successfully funded via my NSF grant until he has put in 3.5 years toward his PhD. After that... his tuition and stipend must come from somewhere, and that where it gets messy. I worry that if I don't get another grant in the next year, then I will not be able to support my PhD candidate in his final year. New U. won't pay for him, so we'd have to go begging to old U. for emergency funding (even though I am no longer faculty there!).
So in other words, everything is peachy for the next year... and then money becomes an issue. The last thing I want to do is tell a student they have to leave with a Masters because of money. I'd like to think that all my grant writing will pay off soon, and then we can all get what we want. If the student transfers to new U., then I can fund him all the way through his PhD using new U.'s start-up funds.
It's all very confusing and neither university is entirely helpful about it. I have written so many emails and phoned so many folks that they are tired of hearing from me, and no answers have resulted. They all say, "Don't worry, you'll get a grant and it will be fine."