It has a profound effect. Nothing is the same after it is used. The feelings and reaction of students may depend on the demographics of the student population. When African American students are in the minority, however, they often feel embarrassed and singled out. It's equally important, however, to address the issue regardless of whether the class is racially mixed or homogeneous.
Different teachers handle the word in different ways.
Some never use it, and will not allow students to use it. Here again race can be a factor. A white teacher, for instance, may be far more reluctant to use the word than a teacher of color, regardless of the class demographics. I think I could hurt students by using it, and I don't feel that my minority students want to hear their white peers use that word either. . . And if it turns out we're sacrificing a little academic rigor in the service of not adding to anyone's pain, maybe that's okay. . . .