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Although rats can be trained to use a litterbox, most people prefer putting a layer of litter in the bottom of their cage.  Some people also provide a softer bedding for nest boxes.  Here are some litter options and what to use or not use:

Cedar Shavings/Chips: Do not use!  Cedar contains aromatic oils that can not only cause permanent respiratory problems but also liver damage.

Pine-based Litter: Same as cedar.  Kiln dry pine has most of these oils removed and may be used for animals who are not allergic or sensitive to pine.

Aspen Litter: Look for dust-free aspen.  It has good odor control and is safe for rats.  Can be relatively cheap compared to other safe litters.  The downside is that aspen is easily kicked out of wire cages unless the base is very deep or the litter is mixed with something else.

Pelleted Wood Litters: (Such as Critter Country or pelleted aspen)  Although claimed to be "dust free" most pelleted bedding is crushed to irritating powder under heavy traffic.

Clay Cat Litter: Do not use!  Cat litters can contain harmful perfumes.  Clay litter can be fatal if ingested.

Paper-Based Litter: (Such as CareFresh)  Good at controlling odors and safe for rats.  Paper-based litter has it's own odor which some people don't like.  It is soft and dust-free.

Pelleted Paper Litter: (Such as Yesterday's News or CellSorb)  Excellent for odor control, but still has a paper odor.  Like pelleted wood, it can be crushed to dust as rats walk on it.

Hay: May contain pests or nettles.  There is no absorbency or odor control.

Alfalfa Pellets: Sometimes sold as litter but more often as rabbit food.  It is cheap and has a hay smell.  Like other pelleted litter, this can be crushed to dust and cause sneezing.

Corn Cob Litter: Make sure you get dust-free stuff.  Corn cob can be rough on feet, but most rats don't mind.  It is dust free and good at staying dry.  Rats may kick it up easily from shallow litter pans unless it is mixed with other bedding.  Not good to use for babies who may get impacted from eating it.

Walnut: Like corncob but rougher on feet.  May be toxic if ingested.

Sand/Soil: Do not use!  Can have pests.  Dangerous if eaten.  Hard to clean.  Small particles can make rats sick.

Newspaper: Many inks are toxic, particularly colored ink.  Most black ink used is soy-based and safe.  Rats like to use newspaper as bedding/nesting material and it can work for temporary litter, but it has no odor or moisture control and needs to be changed at least every other day.  (The ink may rub off on rats making them dirty.)

Toilet paper, Paper Towels, or Tissue: Use dye-free and perfume-free stuff.  Soft and good for nesting material, but like newspaper, there's no odor control.

Towels or Cloth Bedding: Hypoallergenic.  Good for use with sick or injured animals or those sensitive to litter.  No odor control and will need changed often but you can do loads of rat laundry every week.  Not good for young rats who may twist or break a limb on long threads.

Recommended products:
Kaytee Aspen
Yesterday's News
Cell-Sorb Plus