Video posted from the classroom at Ben Franklin High School shows the pair, both male, arguing Thursday about whether it is appropriate for white people to use term. The student said it was not appropriate, while the teacher held it was acceptable if part of a class.
When the student reacted angrily to the teacher's use of the racial slur, the teacher responded, "You cannot go through life like a word can affect you."
"N**** is racist for a white man to say to a black man," the student explained to the teacher.
The student went to the principal's office to talk about the incident. "I could see he was very upset," Patrick Widhalm, the head of school, told CNN. Widhalm said he knows the student and has a lot of respect for him.
While the student was in Widhalm's office, a group of students gathered outside also wanting to speak to the principal about the incident.
"About 20 students wanted to meet with me," Widhalm explained to CNN. "My office wasn't big enough so I said, 'Let's just go across to the auditorium.' Soon there were about 100 students there and about 25 students shared their views over the course of an hour."
Video posted on social media shows one student addressing the auditorium during the impromptu assembly. He said, "For a white person, being white is just that. It's just your skin color. But when you're black, it changes the whole way people perceive you and the way people look at everything about you as well."
The student went on to say that discrimination wasn't felt only by black people, and he mentioned discrimination against women and gay people also.
"When you call a gay person the F-word, when you call a woman the B-word, when you say the N-word to a black man," he said, "it's not just a word when you say stuff like that. Realize all the charges and connotations it has in it, just make responsible choices. If you're a teacher and you don't want to get fired, maybe you shouldn't say it."
The student's speech was greeted with rapturous applause.
The school said it is "conducting an investigation into a classroom incident between an employee and a student," and would determine the appropriate steps.
"There were 25 minutes before that video that is critically important for me and the administration to understand," the school principal told CNN.
The teacher, who is a permanent substitute teacher at the school, has been suspended until the investigation is concluded.
Widhalm praised the school community and the students who took part in the assembly that followed the incident.