SSHD Gives error could not open Authorized Keys, although permissions seem correct

If the permissions are correct, SELinux might still be preventing sshd from opening the file.

Try fixing the labels inside the .ssh directory (and maybe $HOME):

restorecon -FRvv ~/.ssh

If the user account uses non-standard home path, default labels for the path need to be added to the local configuration first:

semanage fcontext -a -t ssh_home_t "/srv/custom/\.ssh(/.*)?"

(I’m intentionally not suggesting disabling SELinux or setting it to the permissive mode.)