Hi @jlhummel,
In similar situations I've run into before, Canvas Support has always told me that a user having multiple roles in the same course is not really a supported state. Sometimes things ca work okay, but there are some situations where the roles just conflict and you end up with something like this where you can only see things as one role or the other. I know this isn't a solution, but I really would recommend finding a different way to do this than to have users with a student and observer role in the same course.
Again, I hope this helps, and it is basically the current state of things in Canvas so I'm going to mark it as the answer.
-Chris