This seems straightforward - of course, we want Iowa to win, independent of any feelings towards the two teams.
Since we play both of them this season, strength of schedule is irrelevance. One team will win, one will lose.
So, what would be the difference between the two:
1. Michigan is in our division, Iowa is not. You need to win the division to win the conference, so any conference loss by an East division team helps that. So, Iowa win/UM loss is better.
2. We recruit much more heavily against Michigan than Iowa. One game doesn't impact recruiting but a cumulative effect of losses (and not winning anything of note) does. So, Michigan losing helps PSU more in this than Iowa losing.
I'm not worried about the risk of playing Iowa twice. And if we do, no big deal. Still would mean we are in the CCG which is good.