I can see from the 'radiusd -X' output that FreeRadius is not using MS-CHAP correctly:

 

<snip>

[eap] processing type mschapv2
[mschapv2] +- entering group MS-CHAP {...}
[mschap] No Cleartext-Password configured.  Cannot create LM-Password.
[mschap] No Cleartext-Password configured.  Cannot create NT-Password.
[mschap] Told to do MS-CHAPv2 for USERNAME with NT-Password
[mschap] FAILED: No NT/LM-Password.  Cannot perform authentication.
[mschap] FAILED: MS-CHAP2-Response is incorrect
++[mschap] returns reject
<snip>