Letter of Recommendation from PhD Student for Masters
I think your potential writer (1) gave you good advice: look for a professor first. However, if they can write a strong letter for you then certainly it's better than nothing; your second choice may not actually be a choice if they never respond.
I think if you were submitting at least 3 letters of recommendation, it would be less of an issue for one of them to come from a non-professor, but with only two letters I would suggest you think hard about other options for the second letter. If two letters is only a minimum and you can submit a third, then I think including your option (1) as one of those would be totally fine.
It's important to recognize that recommendations for graduate school aren't primarily about your performance in an undergraduate class, they are about your potential as a graduate student. Professors are more likely to have experience teaching and mentoring graduate students, so they presumably have a better background to evaluate potential in that area.
I did write some recommendations as a graduate student for my undergraduate students, but I wrote them in concert with a professor who also signed the letter.