The 22-year-old, who made three appearances on the club's recent pre-season tour, has also signed a new long-term contract at Anfield.
Phillips is highly-rated by manager Jurgen Klopp and has regularly trained with the first-team squad at Melwood.
But last season, his development was interrupted by a serious ankle injury which kept him out for the majority of the campaign.
The temporary move to Stuttgart is viewed as a valuable opportunity for Phillips to gain first-team experience before returning to Merseyside next summer.
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Phillips is yet to make a senior appearance for Liverpool having joined from Bolton Wanderers in the summer of 2016.
Had Phillips stayed, he would have faced added competition to break into Klopp's first team from 17-year-old Sepp van den Berg, signed from PEC Zwolle this summer.
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