PPPoE pap Authentication failed even with correct password
In order to make it work then you should create a system user as well into your ppp server as well. In your example user1 has been used then you should use the following commands as well:
sudo useradd user1
sudo passwd user1
And provide the password user1 (or any other password assuming this is an experimental setup thus I place the password as well). I haven't managed to do without system user.
An alternative approach is to remove the option login from the pppoe-server-options, this option requires to use the system's user as ppp users as well.