American artist William Merritt Chase established Parsons School of Design in 1896 as the Chase School of Art. While founded as a school of fine arts instruction, it soon added courses in applied arts, which became the primary focus under the direction of Frank Alvah Parsons. The name of the school changed several times, to the New York School of Art in 1902, then to the New York School of Fine and Applied Art in 1909. In 1940, the Board of Trustees voted to change the school's name to Parsons School of Design in recognition of Frank Alvah Parsons' leadership and to differentiate it from other, similarly named institutions.

In 1921, Parsons School of Design's European School opened with headquarters in France called the Paris Ateliers. The Ateliers closed in 1939 due to the escalation of World War II, and never reopened in its pre-war form. Summer study tours of Europe resumed in the late 1940s. When Parsons School of Design affiliated with the New School for Social Research in 1970, students could for the first time earn a Bachelor of Fine Arts degree from the New School. Before the merger, students earned either a certificate for a three-year program of study at Parsons, or a Bachelor of Science degree granted by New York University by taking courses at both schools.

A more robust, year-round overseas program resumed at Parsons in the late 1970s under the leadership of Dean David C. Levy. The 1970s also saw the growth of continuing education programs at Parsons, and the introduction of an Associate in Applied Science (AAS) degree track. In the 1980s, Parsons developed a number of partnerships with international schools, and launched a short-lived merger between Parsons School of Design and the Otis Art Institute in Los Angeles. The first Parsons graduate program was established at Parsons in 1978, in Fine Arts, with masters programs in other areas added in subsequent years, including a Master of Architecture program begun in 1989. The 2000s saw an increase in the number of graduate programs at Parsons, with new programs introduced nearly every year.

Prior to 1970, when Parsons existed as an independent entity, it was headed by a president and a powerful Board of Trustees. Upon the merger of Parsons with The New School, legal authority transferred to a central Board of Trustees for The New School. The Parsons board became a Board of Overseers (later Visiting Committee and, as of 2017, Board of Governors). The position of Parsons president was also eliminated at the time of the merger, replaced by the dean, a position later renamed as executive dean.