Cholo: Funny Nickname Or Racial Slur?

I was reading Babies On the Move (the baby on the cover is from Indonesia, you can tell from the coins sewn around the basket) the other day to my daughter. It has babies around the world and how they get around. They have North America, Africa, Asia, and Latin America featured as well as babies being wrapped in blankets, papooses, strollers, and more.
One of the pictures in the book is off a native Peruvian and her child, typically referred to as a cholo, chola, cholito, or cholita. Short stature, ruddy cheeks, lots of layers, hats, and colourful clothes. They typically live in the mountains. You can find more on Wikipedia.
I worked at a private bilingual school in Lima which had started as a German school. We went to a school in the shanty towns near Lima before Christmas and one of the little kids came up to me and asked me which country my students were from.
Even as the words were coming out of my mouth I realised the irony of it all. I told him that they were Peruvian, just like him. Yet they weren't just like him. My students were from wealthy families who could afford private schooling, trips abroad, and even therapy to help them deal with all the issues they had. They didn't even look alike since most of the students were blond haired and blue eyed.
One tip to remember is that speaking Spanish will help you greatly. You'll be treated differently than if you speak English all the time, it'll help you assimilate, and you'll be able to communicate easier. If you're looking to learn Spanish, the two programmes I recommend are Synergy Spanish and Speak From Day 1. 
 
Funny Nickname?
Peruvians tend to use a lot of nicknames rather than using given names. Some of them are downright insulting: gordo/a (fatty),  tio/a (uncle / aunt), chochera (friend? brother? not really sure how to translate it), amigo/a (friend). Despite my students' background and looks they commonly referred to each other as chola. Even some of the teachers would call each other or the students chola as well. Some people are proud of their heritage as you can see by this shirt that says, "being a cholo is fantastic". Other people disagree and believe that cholo is a racial slur.
Racial Slur
Some Peruvians don't like the word cholo since it reminds them about how the Spanish came and conquered the Incas. Peruvians are still bitter about this conquest. They say the Incas were tall and strong and the Spaniards polluted this bloodline in addition to mistreating the Peruvians.
Wikipedia says that it's a racial slur. And I suppose it could be depending on the context. I guess cholo is similar to the n-word in the US. I personally would never use that since I'm not black and it would be seen as a racial slur. However, I have heard blacks using the n-word when talking to each other. Outside of Peru, cholo has become a fashion statement. Think Latin rapper style.