And they weren't even passing out "racist materials", they were having a joke in a private setting among friends.
But this is beyond a mere legal question. The Constitution can be altered and laws can be interpreted differently by different judges. This is a moral question. The fact is, by any reasonable standard of morality, using the state(in this case a government university) to levy punishment upon someone for "wrong speak", particularly for that said in private and in free and voluntary association with friends, is immoral.