Hi @LindaBrock -
This sounds like a great way to get students involved!
Before exploring this further, I want to point out an important aspect of the Observer role -- when linked to a specific student, observers see the student's work. For Peer Tutors, it may work best for Observers to view the class but not see individual students' work and grades.
An Administrator should be able to add any user to a course and declare the individual's role in the course. The peer tutor can be a student in their classes and an observer in others. It becomes more complicated if they're required to have multiple roles within the same course.