This mixed-method case study investigated digital literacy (DL) development among 32 elementary-level students who created multimodal, contextual, and interactive augmented reality (AR) artifacts in a 20-week after-school program in Northern Taiwan. The instructional design combined situated and spiral learning experiences with AR, implemented through a blended learning environment. Data sources included pre- and post-program digital learning student surveys, student and teacher interviews, classroom observations, and AR artifact assessments. Results indicated statistically significant increases with moderate effect sizes in five areas of students’ DL practices: information management; collaboration; communication and sharing; creation; and evaluation and problem-solving. Students did not increase DL in one area: ethics and responsibility. The situated and spiral learning-by-design approach offered increasingly complex AR creation projects in which students developed and transferred their DL. The face-to-face and online learning settings offered multiple ways to collaborate and facilitated the development of students’ DL. The AR technology enabled students to develop DL through designing AR using three types of representation features: multimodal, interactive, and contextual. Practical and theoretical implications for adapting or enhancing this instructional design in future DL programs and for future research are discussed.