Times have changed and young people do not seem to know where this word originated from and the shocking history that is associated with the use of it. They hear it in music constantly and - yeah, no doubt they say it to each other on a daily basis (white kids AND black kids) to be 'funny' and maybe a little dangerous. It is not said to belittle or to hurt - they say it to be 'street'.
I doubt they have any knowledge of how black people were treated - after all some of their best mates are black - they probably couldn't even comprehend a time where, if they walked down the street together they would be abused. If a white woman married a black man (or vice-versa) they would be social pariahs.
They're not out of control bigots, they're uninformed. They no doubt know buggar-all about the horrors of the holocaust as well.
Don't forget - we are dealing with the MTV generation here. They can be silly, they can be shallow but they are probably a million times LESS racist than people of their same age were 100, 50, 20, even 10 years ago!
Give them a break. Don't make them scapegoats, teach them some historical facts (teach it to the black and the white kids -after all they all sit side by side in the same classrooms now).