Keep an eye out at your local bike co-op or somewhere for some aluminum wheels. I doubt you'll find any aluminum offerings in 26 x 1 3/8, nor will you find any decent tires for it. You may be able to fit 27" wheels in your frame. If you stick with the steel wheels, you'll barely be able to slow yourself down when the wheels are wet, much less stop.

The best thing to do is keep an eye out for another bike at garage sales or your local Salvation Army/Goodwill or similar store. You're looking at a lot of money to replace the wheels, cranks, bottom bracket, etc. I got myself a Nishiki Custom Sport for $5 at a garage sale. It was built with Tange Double-Butted tubing and had aluminum wheels, Sugino GT cranks, and other decent parts. After stripping all the excess crap, I only had to buy new tires and bartape. I had it running for less than $30 total. If you fix your current bike up, the cranks alone will cost you more than that. There are better bikes to learn with.

And here's my 2 cents on painting:
Don't do it. I have painted a couple frames in my time, and both turned out bad. It's not because I did it wrong; it's just the nature of spray paint. If you want to get it done right, you have to get it powdercoated or professionally done, or else it'll just chip and flake off real easily. Besides, there are so many bikes out there with generic, one-color paintjobs that just look so drab and boring. Leaving the original paint gives the bike character and history.

I know that none of this is probably what you want to hear, but I'm just trying to accelerate your bike learning curve. I've built up about 10 bikes since I got into this whole cycling thing, and only recently have I built something that most would consider decent. Now I have a ton of useless frames and parts in my basement, and only 3 bikes that I actually like.