OSU has made the Playoffs without getting to Indy, so it's not THAT far fetched.
Perhaps PSU drops a game to Pitt but then runs the table in the Big Ten. In that case Michigan's one loss to Penn St might be viewed as a "better loss" than PSU's one loss to Pitt.
It is possible but I agree with the above comments that PSU would absolutely have to lose AT LEAST one other game. However, it wouldn't HAVE to be a non-conference game. It could be a conference game because in that scenario PSU would still win the H2H tiebreaker. It could also be the CCG particularly if the B1G-W Champion was not highly ranked/respected. It, or rather they, could also be both.
Ie, consider this scenario:
1) tOSU loses to at least PSU and M in conference.
2) PSU beats the Buckeyes (in Columbus) and the Wolverines (at home) but loses to Pitt and at Iowa.
3) Other than their loss at Penn State, the Wolverines run the table including a quality win over a highly ranked Notre Dame squad.
4) The B1G-W is very evenly matched and becomes a circular firing squad where everybody loses a few games and the eventual B1G-W CG representative is a team that has two conference losses and an OOC loss.
5) In a surprise upset, B1G-E champion Penn State loses to the 9-3 B1G-W Champion in the B1GCG.
At that point the B1G's CFP possibilities would be:
B1G Champion, 10-3 B1G-W Champ (with an OOC loss and two conference losses)
B1G-E Champion, 10-3 Penn State (with losses to Iowa, Pitt, and the B1G-E Champ)
B1G-E co-Champion, 11-1 Michigan with a road loss to Penn State
Based on what the committee has shown us in the past, I think it is clear that the two three-loss B1GCG participants would be out but 11-1 Michigan with quality wins over ND and tOSU and a "quality loss" on the road to Penn State would probably get in. Note that in this scenario it helps Michigan substantially if the Buckeyes are 10-2 because then they could have wins over two top-10ish teams (tOSU, ND).