Rusting in a microwave oven's interior is a sign of microwave leakage due to faulty operation. If not corrected, the metal beneath the rust may become exposed creating sparks or cause arcing. Repeated arcing damages the microwave oven.
Exposure to microwave energy is suspected to be carcinogenic. According to the U. S. Occupational Health & Safety Administration, extensive research was conducted by regulatory agencies worldwide, including the American National Standards Institute, the British Health Protection Agency and the World Health Organization, as to whether electromagnetic energy from commonly used products such as microwaves and cell phones are responsible for damage to neurological and reproductive systems. So far, the consensus is that exposure to microwave energy from ovens is minimal, as long as the oven seals are intact and the appliance is in good working order.
Rusting, and peeling and flaking paint may not be an issue initially beyond being unattractive. Still, the microwave should either be replaced or repainted. If you choose to take on the job of repainting, the interior of a microwave can be painted with epoxy paint, widely available at home improvement stores. This is probably a job best left to a professional if you are inexperienced.
Microwave dangers do not primarily come from rust. According to the Alice! Health Promotion Program at Columbia University, the greatest danger to microwave users is the possibility of severe burns. Microwaves heat foods and liquids to extremely high temperatures very quickly. Additionally, microwave cooking can result in hot spots due to uneven cooking. Unless stirred, some parts of a microwaved meal may be cold and not fully cooked, while others may be piping hot.