The 19-year-old forward from St. Paul, Minn., was selected seventh overall in last year's draft.
"I feel returning to school best serves my future as an NHL player at this time," said Okposo. "I want to be able to step right in and help the Islanders in the future. I didn't feel that I can do that right now.
"Minnesota is the best place for me to be so I can continue my development."
Okposo played for the U.S. team that won bronze at the world junior championship in Sweden.
He also finished second on the team in scoring during his freshman year at Minnesota with 19 goals and 21 assists for 40 points.
The Islanders are supportive of his decision to stay in college.
"Kyle has a very bright future and another year at the collegiate level will give him the opportunity to continue his development into the player we all imagine he can be one day," said Islanders GM Garth Snow. "We're looking forward to watching Kyle be a leader at Minnesota this season."