The error message “Starting sshd: Privilege separation user sshd does not exist FAILED” is received on restarting the SSHD service. It indicates that the user ‘sshd’ does not exist at all. To fix the sshd privileges issue, you need to add the ‘sshd’ user on the server.

Edit the file /etc/passwd and add the below line:

sshd:x:74:74:Privilege-separated SSH:/var/empty/sshd:/sbin/nologin

and the below line in the /etc/group file

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You will now be able to restart the sshd service.

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    # /etc/init.d/sshd restart
Stopping sshd: [ OK ]
Starting sshd: [ OK 
Another solution is to disable UsePrivilegeSeparation. Edit the sshd configuration file at /etc/ssh/sshd_config and change

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    UsePrivilegeSeparation yes
    UsePrivilegeSeparation no 
It is less secure but just another option.