The most common argument I hear is something like this:

Local people speak dialect, or non-standard Mandarin, so therefore Yunnan it is not suitable.

Personally, I don't think it matters much, because:

1. Much studying is done in classroom anyway;
2. Daily communications with local people is in Standard Mandarin;
3. You simply don't pick up Mandarin (as say a language from the same language family).

I'm a fairly advanced speaker of Mandarin by the way.

I would like to hear opinions, do you have different experiences?

a bit like going to newcastle to study english, daily communication with locals working class is not in standard english. but if you are advanced speaker of mandarin anyway, if you talk they will understand in the towns anyhow, if they talk you will get the main gist and soon work out the difference. e.g. 100 = yi bei. if you go up in the mountains, some of the farmers or working class older people wont speak mandarin. those who do can also have pretty wild pronunciations and grammar.

definitely one of the worst places to study mandarin, if you're the kind of person who learns through speaking with locals etc

the dialect is different, but not different enough that you can separate it in your mind from standard mandarin.

if you're a real real beginner thought and only learning for a semester or 2 in school then possibly it's ok, but in my experience people who learn mandarin here do it much more slowly

I agree with @kerb and @dazzer, and as a native Mandarin speaker, I think I can shed some light on this topic.

I was grown up in Zhejiang Province, I found that local people in Yunnan really stick to their dialect heavily. In Zhejiang we have our own dialect, which is even more different from Mandarin than the Yunnan dialect, however we don't use it as often as they do here in Yunnan. You would also find that people in Zhejiang, as well as in areas/provinces along the coastline, speak Mandarin a lot more better than the other areas of the country.

One of the reasons is of course that Mandarin was introduced based on the dialect in a place in Hebei (Luanping, Hebei), so it would be easier for the people live in areas nearby to learn Mandarin. However more importantly I think the violent growth in economy also helps areas along the Chinese coastline to better popularise Mandarin. When I went to school in Zhejiang back in the 90s, it was already regulated by the government that Mandarin should be the only language spoken in schools, so neither teacher nor students would be allowed to speak our dialect, and that really helped Mandarin to spread over the years, in the areas mentioned above (Guangdong being a exception, for that we can have a whole discussion on the power of Cantonese another day).

So back to the question, NO I don't think it would be a great experience to learn Mandarin here in Yunnan, especially for starters, the pronunciations and grammar could get really nasty here, after all learning a new language effectively is about submerge yourself in the right language environment. However it wouldn't matter too much for advanced Mandarin speakers, also in areas like Yunnan if you could learn to use a bit local dialect, it would help vastly for you to blend in the community.

As a non-student, I'm curious about other considerations than learning the language for foreign students who come to China.

Not just experiencing the language, but the diverse ethnic cultures. Yunnan has a lot to offer in that perspective.

Also things like cost of living may count for some. Many foreign Mandarin students end up taking teaching jobs (legit or not) because they need the money.

I'm sure there are cheap cities also in the coast, but provincial capitals?

Also border-crossings are close here.

@Janjal, some other consideration.
One aspect of learning, is your fellow students. If most of the students in the class are Asian, they fit in well with the learning style, and you will be the odd one out. If you do a class with mostly Japanese SS they will have no problems with reading and writing and you may get your confidence undermined. By contrast, if most of your fellow SS are western, then although the norm in a university is the Chinese teaching style, you will all be in it together.

A few universities (e.g. Shanghai, Jioatong) separate the students and have a different class methodology for western SS, than they do for SS of other Asian countries.
If your teacher is a fresh graduate of teaching Chinese to foreigners course, they may be a bit rigid in their methodology. A more experienced teacher will know more of the quirks of teaching westerners.

One advantage of learning in a university is the cost is much lower, and there may be cheap accommodation. Also if you are a younger person, it is easier to connect with local students who may even be your dorm mates.

The advantage of learning in a private language school is smaller class size, more flexible teachers, and different methodology and course materials.
The other big difference is course materials. Most university courses have a lot of university vocabulary (admissions, cafeteria, library speak) that you will not use, and this is front loaded on the course and can be frustrating if you want to go out and use the language.

Cheap places to live. Kunming is not cheap, most Chinese tier 1-2 cities are not. As @waynecaoaus noted, most of Zhejiang uses Mandarin (maybe because it is not mother tongue but learned, it is more standard) there will be lots of small cities along the coast dependent on trade that use the language daily for business. These would be cheaper places to live.

As for the other things, maybe it comes down to whether or not your focus is learning the language, or if you are using learning Chinese as a shoe in for visiting China longer term. A lot of students are probably the latter.

I first studied Mandarin, and used it daily, including for social science field research, in Taiwan many years ago. Arriving in Kunming 15 years ago I found that I could use the language pretty much without serious problem with most people, although not with those who really could not handle anything other than their own local dialect. While here I've done 3 semesters of remedial Chinese (largest problem for me was simplified characters, after having learned fantizi in Taiwan. I studied at KCEL and at Keats - both were ok, Keats was best. I have never adequately picked up local dialects and pronunciation, but I have had no trouble using and improving my Putonghua here. If you've already got a good background in the language I'd recommend Kunming - no, not the best place to study the language, perhaps, but the best place to be while you are doing it. So I think you'll be fine.
I also know quite a few western foreigners who have learned Chinese entirely in Kunming and have no particularly serious problems. So if you've got a pretty decent base in structure and pronunciation, I think Kunming is a fine place to continue - and, as I said, not just for the language. I have no real trouble traveling about Yunnan and elsewhere alone with the language I know.

Where's the best place to learn Chinese is something I worried about when I first came to China. After many years I've decided it's no big deal. First of all wherever you go you're going to face the problem of local dialects. Even in Beijing they have the irritating erhua which means almost every word ends in a sort of growl. Secondly almost everyone you're likely to make friends with will be able to speak standard Chinese and will speak it with you.

Of course groups of friends will lapse into the local speech but you'll still get the gist. And why not see it as a plus and learn some of it? Yunnan has lots of advantages and coming here won't slow your language learning down.

@WayneCaoAus

Interesting, but are you talking about learning the language as a kid / growing up in Yunnan?

I mean, as an adult learner (let's say from a western country) can you really learn Mandarin through speaking with locals? I would definitely argue against...

@cloudtrapezer How's your Kunminghua?