I have two recomendations for marking pencils:
1. Dixon wash out markers. These are chalk based and sold in the Clotilde catalog ($.95? each). These have been recommended to me by a professional quilter. I have only recently spotted them in the Clotilde catalog after calling all the local fabric/quilting stores.
2. Artists graphite pencils (several brands). These contain no wax, oil, etc. They were designed for artists who so pencil drawings, the lines are easily smudged or rubbed off completely without need for an eraser. I use these most of the time and they show up well even on black fabric.
I recommend using Painter's Fabric Markers, watch out they also make markers which aren't for Fabric usage. I purchased the 8 primary colors at the local chain fabric store (New York Fabric) for $2.79 each (not on sale). Michael's craft store also carries them. The colors are brilliant, they also carry other colors. Painter's Fabric Markers requires heat to set the ink.
I tested three types of markers: 1) Painter's Fabric Markers, 2) Sharpie pens, and 3) Marvel Fabric Markers. I made sample blocks and hand scrubbed them using each type of pen. I found the Painter's Fabric Markers to be the best. Sharpie pens ink ran and faded. The Marvel markers were not as brilliant and faded.
I made a class quilt for my daughter's first grade teacher. It was a class quilt where each child using fabric markers drew a picture on a 5 x 5 square. It turned out beautiful but it sure was alot of work. It was worth all the time just to see the childrens reaction to their art work in a quilt. It took a total of three weeks: to get the children squares, buy the remaining supplies and fabric; piecing, binding and tying the quilt. I was only able to work on the quilt at night (after my babies were in bed) and one weekend. We even took a class picture and each child got a copy of the photo. The teacher loved it and it was the talk of the school. The other first grade teachers are anxious to get my other two kids in their class (they were only joking with me, I think!) My husband was really great support and kept me motivated. I credited me finishing the class quilt in time to him. He had to make the coffee and help me do some of the finishing work. He also cut 35 pieces of 8"x8" cardboard to mount each piece of muslin using masking tape.