Number 2 is fine, however I do not see them putting Michigan, Ohio St, Michigan St. and Penn St all in the same division.
I like this breakdown:
Nebraska, Iowa, Minnesota, Wisconsin, Northwestern, Illinois, Michigan St
Indiana, Purdue, Michigan, Ohio St, Penn St. Maryland, Rutgers
With these divisions the Big Ten could get rid of the mandatory rival crossover, the only natural rivals not playing would be Michigan St and Michigan. If not, they could look like this, maybe:
Mandated cross over: Nebraksa/Ohio St, Michigan St/Michigan, Illinois/Indiana, Northwestern/Rutgers, Minnesota/Maryland, Iowa/Purdue, Wisconsin/Penn St