Do I have to erase the grey pencil, or do the marks come out in the wash?

depends on the type of pencil used, hint...ALWAYS do a test, some things never come out :cry:

Try an art gum eraser

erase all you can first. then there is less to remove in the wash. You don't say which grey pencil you are using.
Type depends on how you get it out.
There are most likely 100's of gray pencils.

If it is the silver marking pencils that are for marking fabric do not under any circumstance iron it----it then becomes permanent----ask me how I know???

CoyoteQuilts Made me quiver, you must have first hand experence............calla

I have tested marking instruments on scraps of all of the fabrics in a quilt before using them on the final project. This includes pressing over them, I want to know what will work and what won't before hand :D:D:D

any pencil that has wax in the lead is not likely to completely come out in the wash. It also will be almost permanent if ironed over.