The 18-year-old joins the Bundesliga side until the end of the 2017-18 season, having spent the second half of last season on loan at Championship club Reading.
Oxford broke into the Hammers first team during the 2015-16 season, having made his competitive debut as a 16-year-old in the Europa League qualifying stages. He became West Ham's youngest ever player, and then went on to become the second youngest Premier League starter.
He played 14 games for the Hammers that season, but could not win his place back in the starting XI under Slaven Bilic last year. He is highly regarded at the London Stadium, and was named as the 17th most promising talent in football in the 2017 NxGn list.
Oxford signed a long-term deal with the Hammers in December, extending his stay at the club until 2021. Bilic was delighted that the teenager put pen to paper on a new contract, especially considering the fact that clubs like Manchester United and Manchester City were linked with a move for him.
"We are not the kind of club who could sign Reece if he was somewhere else," said Bilic. "We can’t afford to pay that kind of money for someone who is for the future.
"Those kind of transfers are for the biggest clubs who can spend £20million on someone who will not be in the squad for a year or will give him a loan. We can’t buy someone of his quality. Maybe abroad if we are quick, but a British one? No way.
"It is an important statement but without Reece it would not be possible. He wanted to stay. Those offers and interest from the other clubs were not just rumours in the newspapers, they were real. So we are delighted he is staying with us."
Oxford played just two Europa League games for West Ham last season, but will be hoping to gain more first team experience with the German club.
“Reece Oxford has played for England at youth level and is considered one of the country’s best young defensive talents,” Gladbach sporting director Max Eberl told the club's website.
“This loan deal gives us the chance to add a very interesting player to our squad. On top of that, we’ve had good experience with signing young Premier League players in the recent past.”