This should be a close game. The only blowout loss (10+ points) Michigan has had under Harbaugh is the 2015 OSU game.
If Michigan had a halfway decent passing game, I'd feel optimistic, but I've given up on that at this point. It's encouraging to see the running game, particularly Higdon, emerge, and I do think Penn State's defense is overrated, but I'm not sure how effective they'll be. This probably won't happen, but if O'Korn looks bad enough, perhaps they'll sub in Peters who would hopefully be marginally better....
Otherwise, the team's best chance is to force turnovers on defense to at least get the offense in FG range, if not score themselves. I think they give up 2 TDs at most, unless the offense turns it over on their own side of the field. Special teams have been pretty strong except for kick returns, as well.