The Triwizard Tournament was dangerous, hence the reason why it was cancelled and not run for many years.

So why did the school use real students for bait? Could they not have used Transfigured objects to look like the students? I am assuming that Professor McGonagall and Dumbledore would have the required skill to do this.

Or they could have used Polyjuice Potion brewed by Professor Snape and then have teachers in the guise of the students to act as bait if they needed real people to save. This would have meant that experienced wizards might have been able to help stop a death that might have occurred.

It seem rather reckless to use real students for this task.

There were most likely several safety precautions involved, especially with the merpeople themselves.

Dumbledore, and the other teachers, likely had several safety precautions in places to prevent harm to any of the students, as we see Harry realising.

Harry’s feeling of stupidity was growing. Now he was out of the water, it seemed perfectly clear that Dumbledore’s safety precautions wouldn’t have permitted the death of a hostage just because their champion hadn’t turned up. Why hadn’t he just grabbed Ron and gone? He would have been first back.

_{Harry Potter and the Goblet of Fire, Chapter 26, "The Second Task"}

Ron also comes to pretty much the same conclusion before when Harry breaks through the water's surface with him and Gabrielle.

The crowd in the stands was making a great deal of noise; shouting and screaming, they all seemed to be on their feet; Harry had the impression they thought that Ron and the little girl might be dead, but they were wrong... both of them had opened their eyes; the girl looked scared and confused, but Ron merely expelled a great spout of water, blinked in the bright light, turned to Harry, and said, “Wet, this, isn’t it?” Then he spotted Fleur’s sister. “What did you bring her for?”

“Fleur didn’t turn up, I couldn’t leave her,” Harry panted.

“Harry, you prat,” said Ron, “you didn’t take that song thing seriously, did you? Dumbledore wouldn’t have let any of us drown!”

“The song said —”

“It was only to make sure you got back inside the time limit!” said Ron. “I hope you didn’t waste time down there acting the hero!”

_{Harry Potter and the Goblet of Fire, Chapter 26, "The Second Task"}

In fact Dumbledore speaks Mermish and was in conversation with the chief merperson after all the champions had reached the surface. It seems likely that they would have had some measures in place with the merpeople in case anything bad should happen.

Dumbledore was crouching at the water’s edge, deep in conversation with what seemed to be the chief merperson, a particularly wild and ferocious-looking female. He was making the same sort of screechy noises that the merpeople made when they were above water; clearly, Dumbledore could speak Mermish. Finally he straightened up, turned to his fellow judges, and said, “A conference before we give the marks, I think.”

_{Harry Potter and the Goblet of Fire, Chapter 26, "The Second Task"}

In fact this seems all the more the case when we see them watching Harry as he rises to the surface and is struggling.

Merpeople were rising with him. He could see them swirling around him with ease, watching him struggle through the water. ... Would they pull him back down to the depths when the time was up? Did they perhaps eat humans? Harry’s legs were seizing up with the effort to keep swimming; his shoulders were aching horribly with the effort of dragging Ron and the girl. ...

_{Harry Potter and the Goblet of Fire, Chapter 26, "The Second Task"}

The merpeople were also heavily involved in the task and seem to know the rules of it, considering they wouldn't let Harry take more than one person.

Harry looked around. There was no sign of any of the other champions. What were they playing at? Why didn’t they hurry up? He turned back to Hermione, raised the jagged rock, and began to hack at her bindings too —

At once, several pairs of strong gray hands seized him. Half a dozen mermen were pulling him away from Hermione, shaking their green-haired heads, and laughing.

“You take your own hostage,” one of them said to him. “Leave the others...”

“No way!” said Harry furiously — but only two large bubbles came out.

“Your task is to retrieve your own friend... leave the others...”

_{Harry Potter and the Goblet of Fire, Chapter 26, "The Second Task"}

The ‘hostages’ in the lake were never actually in any real danger.

The hostages in the lake were never really in danger, they were actually quite safe. Both Hermione and Ron (when he wasn’t making up things to sound impressive) said that when they were being prepared for the Second Task, Dumbledore put them into an enchanted sleep and they’d wake up when they were back above water. At no point were they actually in any danger.

“At first, he gave what seemed to be the truth; it tallied with Hermione’s story, anyway – Dumbledore had put all the hostages into a bewitched sleep in Professor McGonagall’s office, first assuring them that they would be quite safe, and would awake when they were back above the water.”
_{^{- Harry Potter and the Goblet of Fire, Chapter 27 (Padfoot Returns)}}

Dumbledore wasn’t going to let innocent people who weren’t even contestants in the Triwizard Tournament be in danger just so the champions would have a motivation for their task. The sleep they were in prevented them from drowning, and additionally, the merpeople were guarding them.

“Harry sped towards the hostages, half expecting the merpeople to lower their spears and charge at him, but they did nothing.”
_{^{- Harry Potter and the Goblet of Fire, Chapter 26 (The Second Task)}}

The merpeople were with the hostages the entire time they were underwater, and armed with spears, so if a threat other than drowning should arise, they’d be able to keep them safe if needed. Dumbledore was able to find out from them what happened with the champions under the water, so he can communicate with them and believes them to be trustworthy enough to trust their account.

“Mer-chieftainess Murcus has told us exactly what happened at the bottom of the lake, and we have therefore decided to award marks out of fifty for each of the champions, as follows …”
_{^{- Harry Potter and the Goblet of Fire, Chapter 26 (The Second Task)}}

Harry at first believed that the merpeople were a threat, but the evidence doesn’t really support that. In fact it seems more likely that Dumbledore (as he can communicate with them) had them act as guardians of a sort - they refused to help Harry free his hostage or take more than one, but that seems likely to be because of the rules of the Tournament rather than malice. The hostages weren’t in danger then - if there was a real danger then the merpeople would likely have acted differently. Considering Dumbledore’s extreme anger at the Ministry placing Dementors at Hogwarts, it seems highly unlikely he’d be willing to leave people with creatures he didn’t trust or thought evil.