I just tackled one that was badly rusted with bubbling paint. On that one I scraped off the worst of the rust and flaking paint and just oiled it. I wasn't sure how far to take trying to repair it because I knew I was going to give it back to the original owner's family.
I think it depends on the machine. A couple small areas aren't a big deal. Cleaning the rust off and just oiling the machine goes a long way toward making it look better and slows down any further rust. I would scrape off the loose paint so rust can't hide under it, also a smooth bed is easier to sew on.
Rodney