How much rust is too much?
 

I have an older frame that I've got some plans for, but it has a fair amount of rust on it. The surface stuff I can grind off and repaint, but there is also some in less accessible places like inside the bottom bracket sleeve (don't know the proper name). Also, when I move the frame around I can hear what sounds like sand rolling around in the tubing, which by my understanding means that there is internal rust. Is this frame still usable or should I toss it out and use a different one for my project?

Any way to get an inspection light in there and look? Usually the frame tubes are open to the BB shell. Surface rust is no problem, you can usually just buff it off. (I use a dremel and wire-wheel) but rust that is "into" the metal, causing visible pitting and such; I'd bee leery of putting any stress on it. You do NOT want a major frame-tube failure.

Grit inside is not always rust, in fact critical rust is scales built up on the walls. The places to check for rust will be the downtube-into bottom bracket shell and chainstays. These areas tend to concentrate what water enters the frame. If you can get a view in with a small mirror or probe, look for scales or orange rust(there are colors). That is the more active variation.
If the surface is not scaled but still has rust(even if it does not) use a product called Extend. It applies like a paint, through a wd-40 style nozzle spraycan. Once applied it will convert the rust into an inactive surface coating and it will not be a problem later(if coated adequately).
If there is scale buildup(you can see edges or major pits), ask yourself what service duty/life you are asking for. If it is not on welds and the pits are not major, then it can be used, but decidedly limited in lifespan, as these points can cause stress or continued rust issues.

if it's an Italian frame, toss it. Older Italian cars and Italian bikes are made of Russian steel that is pre-rusted for your convenience.

It's a Mongoose frame from about 1993, made in China. Nothing special, but if its still good, I'll use it. I'll have to get a light and mirror and look up the tubes.