unable to drag and drop folder files to collection sets.

Actually, it should be possible to drag a folder onto a collection set. That should create a collection from that folder inside the collection set. I just tried and it works for me on my Mac. Not sure if it works on Windows too. There are some small 'drag-and-drop' differences between the versions.

Some points to consider-

Nothing in Collections is 'Physical'.

Collections are all 'Virtual' although they may look like a folder hierarchy.

Your photo files remain in their hard-drive Folder location- nothing is 'moved' when you add photos to Collections.

Collection SETS can only contain other Collections, or other Collection Sets. (Not photos)

You cannot drag a Folder from the Folder panel to the Collection panel. (Only photos can be dragged) Use the method to create the Collections as shown by @johnrellis 

You cannot drag photos to a Collection SET.

You can only drag photos to a Standard Collection, or one of the special Collections eg. A saved Book, Slideshow, or Print Collection.

You must position the cursor and hold on the image area of a thumbnail to drag photos to a Collection. (Dragging from the grey thumbnail border does not work.)

https://www.youtube.com/watch?v=d-rF5O6kqog&feature=youtu.be

In the Folders panel, right-click a folder and click Create Collection. Then in the Create Collection dialog, chose the desired collection set.

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