Update: yesterday my son tried to apologize to the kid for using the word, clarifying how he didn't call him the actual word. The other kid starting yelling "n*****" as loud as he could. My son walked away and the kid's friends started mocking my son. Apparently another kid video recorded and would become evidence later.
When he got home he told us what had happened. We talked to our neighbor, who is the school counselor. Apparently this isn't the first incident with the kid. He said he would take care of it but wanted to talk to my son about why he shouldn't ever say the word in any context. I said sure and got my son and listened to him as he, a black man, explained why it was so offensive to him, even in that context, and how it simply shouldn't be used at all.
My son went to school today and the principal called them both in to the office. He put both parents on the phone and asked us to remain silent. He asked for each kid to explain what happened and the other kid agreed to my son's side of the story after the principal played the video of him yelling at my son. He again lectured/educated my son to not use the word and then lectured the other kid for bullying and lying. They both apologized and went their separate ways with the other parents chiming in "please don't suspend our son again, we will take care of this." He dismissed my son to class and stated he would call us back. Later he called and said our son wasn't in trouble and wouldn't comment on the other kid's punishment. Just reiterated that the other kid wouldn't be bothering my son again and if anyone else says anything they would be disciplined as well. Couple of kids during the day said things to my son. Two of them were caught and were sent to the principals office as well for further discussion which apparently included parents.
We talked to the counselor/neighbor this evening and this isn't the first incident with the word and they were going to be having each class "educated" during first hour later this week.
Hopefully this blows over soon.