Diag Rats refers to a group of people who hang around a spot called the "diag".

This spot is a common meetingplace on University of Michigan property in Ann Arbor, Michigan. The Diag is a central sort of walk-only campus with many grassy areas to sit on. It gets its name because of the many walkways and paths that run through it diagonally to the streets surrounding it.

"Diag Rats" are local Ann Arbor (and sometimes neighboring cities) residents who hang out in the diag on a regular basis. Most of these locals range in age from teens to mid-twenties, and a few older.
Look at that big group of Diag Rats sitting under the tree. I wonder if they have any drugs?
by Ashface! September 25, 2006