Asking a graduate student for a recommendation for an internship?

The right thing to do is to follow the instructions. You're trying to "second guess" which person would write the best letter, and how the evaluator will view the letter once it is received. You do not have control over either of those situations. You might get the letter from the person who "knows you best," but the letter turns out to be a disappointment and doesn't help much at all. You also have no way of predicting what might "look bad" to the people who examine your application materials. Instead of trying to influence matters which are beyond your sway, do exactly what the directions said, get your letters from faculty members, and trust that things will work out. Remember that the letters are only part of the package, so "he's a good student" might be all that's necessary.

Its not their credentials that will impress them its their observations of you and the context in which they are able to recommend you that is important.

Hope that helps.

Good luck on your internship quest. Also do gather some volunteer hours as they look good on your resume for jobs as well as further education

Grad student is not on the faculty. Do not expect any letter from a grad student to be worth the paper it's printed on. Not even if that grad student is a teaching assistant, since they only assist professors or possibly take on an entry-level class for freshmen.