Since it's a just a chunk of iron, you could just use a steel brush (or sandpaper as Zorro sez) to get the extra rust off. If you're really paranoid about it, coat it with 3-in-1 oil to convert the remaining rust, then grease and use.

However, my extraordinarily non-extensive materials science knowledge tells me that rust + iron does not yield more rust. The thing you have to worry about is water + iron, which does yield rust.

However, around here (and around bikes in general), nobody is really fond of rust. So dispense with it at will.