Under the plans, Spain would have only provided Erasmus grants to students who had previously received financial aid from the government to study in Spain.
This would have seen many thousands of students who are already studying overseas facing a serious funding shortfall.
To make matters worse, students only found out about the planned move after the academic semester was well underway.
"We've been on Erasmus for two months and now they tell us the truth," one Spanish student complained.
"Is it really legal for them to change the law for 2013–14 courses two months after they started? Even after they PROMISED us they would help?" tweeted another under the hashtag #ErasmusRIP, which has been used more than 50,000 times in the past three days.
But Spain's Education Minister Jose Ignacio Wert on Tuesday did a policy flip flop on the legislation after mounting pressure from universities, students, Spain's regions and even the leadership of his own party.
He confirmed that all Erasmus students currently overseas would now receive funding for the 2013–2014 academic year.
Wert had earlier justified a move to restrict such grants by claiming the new legislation would provide more equal opportunities to students in Spain who drop out of university due to a lack of funding.
"We either give €38 ($51) a month to all of them or €250 to those who really need it," the Education Minister said about the "painful" regulation in a press conference earlier on Tuesday.
The European Commission had backed Spain’s Ministry of Education on the regulation but criticized Mariano Rajoy’s government for "not informing students at the beginning of the academic year".
"We hope the legitimate expectations of (Spanish) Erasmus students are fulfilled," said EC spokesperson Olivier Bailly in reference to what the young Spaniards themselves were referring to as the Education Ministry’s “broken promises".
Now that appears to be the case, with Spain's Education Minister saying a special meeting will be held to establish how funding for the country's current crop of Erasmus students can be secured for the academic year.
The Erasmus Programme is an EU student exchange programme which has given millions of young Europeans the chance to live and study in another member state since it was established in 1987.
According to EU figures, Spain is the leading destination for the Erasmus exchange scheme and is also the country that sends most students abroad.
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