I am fully in favor of bringing back tiered spells into the game, it seems strange for a FF game not to have them.
The OP's suggestion of replacing the lower tier spell is the best way of doing it without cluttering up the magic options.
Some upgrading ideas:
Spells upgraded via Job traits -- for instance:
- Thaumaturge casts Fire (current stats and look)
- Black Mage upgrades it to Fire II (slightly more damage, bigger explosion)
- 'Sage' might upgrade the fire spell to Fire III (bigger AOE, more damage, bigger explosion)
Spells could be upgraded by Guild Quests -- Perhaps we could undergo Class trials to upgrade spells. -- at Conjurer's guild you unlock a quest a lvl 30 that upgrades Cure to Cure II (increases healing by 15%, flashier effect)
Personally, I like the Job idea best as it separates the Jobs and Classes more -- but the Job and Quest ideas could even be combined... maybe as our lvl 55 Job quest?