New York has been named a finalist for potential millions in education aid, but education experts say even if the state wins, the money will not rescue a system that's still faced with some devastating cuts.

The state could receive up to $700 million through the federal "Race To The Top" competition.

Out of 41 applicants, the national Department of Education chose New York, along with 14 other states and the District of Columbia to move on in the challenge.

The honor came despite New York's failure to improve its application by expanding opportunities for charter schools.

Getting into the finals does not mean New York will get any aid, but it's a major step toward winning a share of the $4.35 billion in available education reform funds.

The state Legislature had refused to approve Governor David Paterson's proposal to raise the cap on the number of charter schools and other measures favored by President Barack Obama's administration.

Paterson said that without those steps, New York lost its best chance for the federal funds.

The finalists will be invited to Washington in mid-March to present their proposals to the panel that reviewed their applications during the initial stage, and to engage in question-and-answer session with the reviewers.

In a statement, Schools Chancellor Joel Klein called on state lawmakers to pass a reform agenda to show the federal government that New York is serious about improving schools and being a model for the nation.

The finalists will be invited to Washington, D.C. in mid-March to present their proposals and to engage in discussions with the reviewers.

The competition's first phase winners will be announced in April.

This announcement came as hundreds of city residents participated in a nationwide day of protest for education issues, including budget cuts, class size, college tuition hikes and school closings.

College students on Thursday staged walkouts and three protesters were arrested at Hunter College in Manhattan's Upper East side after marchers clashed with campus police.

None of the arrested were Hunter students.

The citywide rallies included a rally on the steps of City Hall to protest the mayor's management of the school system and a protest outside the office of the Metropolitan Transportation Authority to object to the agency's plan to end subsidized student MetroCards.

There was also a demonstration outside the governor's Manhattan office Thursday afternoon, to protest Paterson's $1.4 billion in cuts to state education funds, including $466 million in cuts to state funding for city education.

"You know what happens, as soon as there's a budget crisis, the first thing that we do is cut back on schools. That's the first thing out of everybody's mouth is 'let's cut back on schools,'" said Ernie Logan, president of the principals' union. "A society is known by how it treats its children. We're always going to be considered a second-class society until we get to the point of putting the money aside to educate our children."

"A teacher in the morning realizes that he or she doesn't have enough paper to run off the worksheets for class that day, the halls become much more crowded and there are more fights as the result," said one protesting teacher of the effects of budget cuts. "A teacher walks into his classroom and finds out he doesn't have enough desks for his students."

Education officials say the Race To The Top funds are earmarked for new programs and innovation and therefore would not help with the system's operating costs.

"I don't want to talk about Race To The Top and all that extra money," Logan said. "Let's talk about what we can do now. That money becomes fleeting if we don't decide to do a dedicated budget for the education of the children of our state. We should not be doing this battle every year, trying to decide what where's putting aside for education."

"This is for moving programs and new things forward," said United Federation of Teachers President Michael Mulgrew. "This is not to plug budget holes so we still have a budget problem, with or without Race to the Top. And we've got to work together, the state Legislature has to work with the community and we have to figure this out because this is not acceptable."

The winners of the second phase of Race To The Top will be decided by federal officials between June to September of this year.