Yeah, crappy situation.
I was this age like 25 years ago (Jesus, I'm getting old) and got called that word in casual conversation surrounding basketball fairly often. (my team in Junior/HS was like half black kids, so it got thrown around a little bit in the locker room, playing pickup, etc.). By the time HS came around, I knew to sort of treat it as a compliment (as one of the few white kids that was on the court at the park around mostly older black guys in their teens/20's)....as weird as that probably sounds. But I still knew enough not to repeat it.
While it might to lead to some additional short term embarrassment, I think sit-down with the school/other kid and their parents probably makes sense. This is PROBABLY something that will eventually be forgotten (assuming no additional incidents) but I think some damage control is definitely necessary.
Sucks. Tough life lesson for sure.