"So we have to do more reforms," said Schwarzenegger.
The application rejection comes on the same day students, teachers and parents participated in numerous protests throughout the state denouncing repeated budget cuts to public education.
At one point, they egged the governor and lawmakers to come down to face them, but few did.
Kari Blauser, a concerned mother, thinks without federal help that could have given California as much as $700 million, it can only mean more cuts to classrooms.
"This could definitely translate into more cuts," said Blauser. "That's where it's heading, that's where it's been heading. Extremely worries me. My poor kids."
While lawmakers believe they've already slashed too much from education, leaders can't promise there won't be more. Cuts have been a primary way to balance the state budget.
"We have a responsibility to govern and in the end, if the deficit remains, if it's $10 billion, $9 billion, $8 billion, we have more work to do and we'll do it," said state Senator Darrell Steinberg (D-Sacramento), senate president.
Trying to put a bright spot on things, some education leaders said it really wasn't about the money, but the controversial changes aimed at improving schools, including linking teacher performance to student test scores.
"Focus on low-performing schools, retain and track the best and the brightest among us for the teaching profession, and to look at our standards, our common core standards to be internationally benchmarked," said Jack O'Connell, California superintendent of public instruction.